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Asset Class Coverage And Investor Satisfaction
EDHEC's survey revealed that investors were most satisfied with ETFs tracking equities (94%), government bonds (78%) and commodities (79%). Fewer were satisfied with ETFs tracking corporate bonds (61%), real estate (55%) and hedge funds (28%). IndexUniverse.eu asked some leading ETF issuers what, if anything, can be done to make the last three fund types more attractive?
Nizam Hamid, head of sales strategy for iShares, countered that inflows into corporate bond ETFs had been extremely strong during the first four months of 2009, to some extent contradicting investors' survey responses. Having said that, he added, investors are increasingly looking at ways of accessing the corporate bond market by sector, so this is an area likely to see additional product development.
Will Rhind, head of sales at ETF Securities in London, explained that the broad-brush approach and market-capitalisation methodology of many corporate bond indices meant that investors were pushed into owning larger amounts of poor-quality financial and auto company debt (to give two examples) than they might like.
The lower satisfaction level with real estate ETFs, added Rhind, could be explained by the fact that real estate investment trusts (REITs), which are heavily represented in indices tracked by ETFs, are a relatively new invention in Europe, and are also highly correlated to equity market movements.
Manooj Mistry of db x-trackers, which launched a hedge fund ETF earlier this year, queried the survey response regarding that category of tracker funds, saying that hedge fund ETFs had not existed in Europe prior to 2009, so it was not clear what lay behind the relatively low levels of investor satisfaction.
Elsewhere in the survey, EDHEC reported that ETFs account for 36% of the surveyed investors' equity allocation, and 22% of their commodity allocation, but only 17% of the government bond and 12% of the corporate bond allocations. IndexUniverse.eu asked issuers whether ETFs will "catch up" in bonds.
According to Hamid of iShares, "bond ETF usage is affected by tax issues, which differ from country to country. Effectively, ETFs are not classified in the same way as the underlying securities that they hold. This means that fixed income ETFs have to be always marked to market, whilst single bonds can be categorised on a "held to maturity" basis, meaning that they do not fall under daily mark-to-market rules for some long term investors. We expect that fixed income ETF usage will increase among multi-asset managers, as they seek efficient exposure in a market that typically lacks transparency."
Mistry of db x-trackers added that bond ETFs were introduced to European investors later than equity ETFs, so it would be normal to expect their usage to catch up over time.
Advanced ETF Features
EDHEC's survey revealed that more investors (28%) use inverse ETFs than short sell ETFs themselves (only 14% do this). Meanwhile, only 12% of investors lend their ETF units. We asked issuers why there was greater interest in using inverse ETFs than in shorting, and whether lending of ETF units would increase.
Hamid of iShares pointed out that inverse ETFs have proved popular with investors, especially for short-term trading, though holding them for longer periods of time can lead to performance that is significantly divergent from expectations. Since inverse ETFs are "non-delta-one" products (that is, they do not give a return of minus one times the index if held for longer periods), iShares expects trading to shift towards shorting ETFs, he added, though up to now only a limited number of investors have been able to do this.
Both Hamid and Rhind of ETF Securities pointed out that the market for lending or borrowing ETFs is less well developed in Europe than in the US, and this can mean that the cost of borrowing even a relatively well-known fund in order to create a short position can be quite expensive, making investors less willing to contemplate this route.
Hamid added that a more efficient market in borrowing and lending ETFs should develop in time, since "there is only a limited number of liquid futures contracts, so borrowing and shorting ETFs on difficult-to-access market segments is likely to become more attractive in terms of efficient implementation."
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