The latest edition of Deutsche Bank's European ETF Liquidity Trends publication shows that country equity ETFs represent three of the top four most actively traded funds across the region (these are, in order, the iShares DAX (DE), the iShares FTSE 100 and the Lyxor ETF CAC 40). Country equity ETFs (including those tracking non-European indices) also make up six of the top 10 funds by assets under management (see the table below, where country ETFs are shown in bold).

Top 10 European Equity ETFs By Fund Size

According to Nizam Hamid, head of sales strategy at iShares in London, country equity ETFs should remain a dominant part of the ETF market in Europe. A few years ago, said Hamid, there had been a general expectation that investors might switch to ETFs selecting companies from across the single currency zone, for example by sector or size criteria, but investor flows in futures and ETFs show that this hasn't yet happened.

In Hamid's view, there is still a very strong country bias amongst European investors when it comes to the trading vehicles and investment exposure that people wish to acquire, with the UK investor a particular example of this, since there is also the question of taking on currency exposure when investments are made in the non-domestic market. But, in continental Europe also, there is a strong residual demand for ETFs linked to home country benchmarks, such as the DAX, CAC 40, S&P/MIB, IBEX, AEX, said Hamid.

Manooj Mistry, head of db x-trackers' UK operation, reinforced this view, explaining that his firm's clients still tend to construct portfolios using country equity ETFs as building blocks. Other types of equity ETFs, such as sector-based funds, are often used as "satellite" products, complementing investors' country holdings.

Claus Hein, executive director at ETF issuer Lyxor, added that his firm had seen significant inflows into the large, blue-chip country equity funds at the beginning of this year, suggesting that fundamental investor demand for these products remains strong. Hein also attributed the increase in ETF purchases to the realisation by many investors that it's difficult to beat these benchmarks through active management, and that going to broad, passively-managed country funds is the obvious next step.

Hamid of iShares added that the bias that European investors have towards maintaining the core of their equity portfolio in the benchmark domestic index is not confined to the retail end of the market; institutional investors follow the same pattern.

It's worth mentioning, also, that the popularity of home country benchmark equity ETFs has enabled certain issuers to establish comfortable niches for themselves in some of Europe's smaller markets: for example, XACT, DNB and Seligson in the Nordic countries, and Alpha Bank's asset management arm in Greece.

Index Methodology

In the table below, we give the key characteristics of the major European equity index benchmarks - the number of constituents, any maximum weighting for individual stocks, the index base level and date, any minimum free float requirement, and whether the index is based on price or total return (that is, with dividends reinvested). All of these indices are tracked by European-listed ETFs.

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