The EDHEC European ETF Survey 2008, sponsored by iShares, was released in June, and gives a useful feel for the state of play in the institutional investor market, and the general level of European interest in ETFs.

Based upon a questionnaire completed by 111 institutional investors from across the region, the results can also be compared with the 2006 survey to give a feel for how things have changed.

What's notable in the report?

First, the overall use of ETFs in Europe has risen across all the major asset class categories in the two-year period since the last survey. More than three-quarters of the respondents are using equity ETFs, and nearly half now use ETFs to track government bonds, corporates and commodities.

User satisfaction levels have also risen for all ETF categories—staying at above 90 percent for equity ETFs, and getting near that for government bond and commodity ETFs.

Satisfaction levels in the other categories, though rising, remain lower.

So ETF usage is now pretty broad and investors have a generally favourable impression. There's nothing surprising here. But what does catch the eye is a table showing how ETF use is not confined solely to the core institutional portfolio.

One of the key arguments of the active fund management industry has been that, while it may make sense to use indexing strategies in the core portfolio, the "satellite" part should be left to the "alpha"-producing fund managers; those in theory able to provide returns in different market conditions, such as hedge fund managers.

What the EDHEC survey suggests is that ETFs are used as readily in the satellite portion as in the core, meaning managers are just as happy to use passive trackers (and then presumably take asset allocation bets) as to stock-pick.

Whichever way you look at it, the indexers are encroaching. And why not? After all, the cost of active management has gone up in the last decade, even though the returns to investors (in developed market equities, at least) have been disappointing.

Another interesting table shows the extent to which ETFs have penetrated the overall market by illustrating the percentage allocated to ETFs within each asset class.

The standout figures are in equities, where ETFs now represent over 20 percent of all invested assets; and commodities, where ETFs and ETCs have been a big success story in harnessing investor assets during the boom so far this decade.

By contrast, assets allocated to bonds via ETFs are lower in percentage terms, despite the fact that the share of the overall European ETF market devoted to fixed income is higher than in the U.S. If the recent arrival of the heavyweight investment firm, PIMCO, in the U.S. fixed-income ETF sector is anything to go by, bonds may well be an area of the market attracting new managers and new product development activity. The other two asset classes showing relatively low ETF penetration—real estate and hedge fund-type products—should also attract some product innovators.

The EDHEC survey also includes a number of tables showing how the surveyed managers rate ETFs against other index-tracking instruments—futures, total return swaps and traditional index funds—with rankings assessed across a number of categories: cost, liquidity, coverage, tracking error, transparency, minimum subscription levels, operational constraints and the regulatory regime.

This is the most comprehensive review of its type that I've seen and has been well thought out.

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