The overall conclusion from this section is that futures are the most direct challenger to ETFs, with futures outscoring ETFs in the categories of liquidity, transparency and cost, but ETFs ranking higher in terms of the range of available markets and asset classes, and with regards to minimum subscription levels, operational constraints, and the tax and regulatory regime.

Here it's worth remembering that the survey was conducted amongst institutional investors, many of whom will have no problems dealing with margin calls, collateral management and other operational issue relating to futures. If retail investors were to be involved, the advantages of ETFs would stand out even more clearly.

When the EDHEC survey then asked respondents to summarise how their anticipated use of these four categories of trackers could be expected to change, the following picture emerged.

Over two-thirds of respondents expected their ETF usage to increase, a higher proportion of managers than for any of the other instruments—even though more managers were likely to increase than decrease allocations in all four categories. This testifies both to the likely further increase of indexation amongst European investors—at the expense of active managers—and to the likely lion's share of the increase being allocated to ETFs.

In terms of the way in which increased allocations to ETFs are likely to be made, the two main areas of note from the survey were using ETFs to gain exposure to new asset classes, and constructing optimal portfolios of ETFs (see the pie chart below).

Using ETFs to extend asset class coverage is an unsurprising answer from the survey participants, but it's interesting to see that over a quarter of the respondents aim to construct optimal portfolios of ETFs. We've seen a growth trend of ETF-only fund managers in the U.S., often using ETFs to gain both long and short exposure in a portfolio and run in a similar way to the original global macro hedge funds, and it would seem there is fertile ground for similar strategies to develop in Europe.

And in terms of new asset class coverage, the survey indicates the most sought-after sectors are in emerging market debt and equities, alternative asset classes and commodities. There's not much obvious demand for active ETFs, despite the hype about these.

In summary, and based on the findings of the EDHEC survey, the European ETF market is extending its scope and investor base; there is still a substantial shift to indexing going on, from which ETFs should be the prime beneficiaries; and there are still plenty of areas of the market that ETFs can reach into to provide asset class coverage.

All in all, this suggests plenty of new work for those involved in the sector, and is a rare optimistic note in a financial services industry still beset by the credit crunch fallout.

Charts obtained from www.edhec-risk.com/features/RISKArticle.2008-07-23.0926

Paul Amery is the European correspondent for IndexUniverse.com. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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