European ETF trading commentary for the week ending 23 October 2009, provided by LaBranche Structured Products Europe (LSPE).

Last week’s flows suggested a clear flight to safety with investors selling equity ETFs and buying funds tracking bonds; our creation ratio was 3:2 in favour of bond ETFs over equities. However, we still saw surprisingly strong demand for ETFs overall, with buyers outweighing sellers by 6:1.

Within the fixed income sector, there were strong inflows into corporate bond ETFs and investors also bought funds tracking EMU government fixed-rate bonds ranging from 1-3 to 15+ years.

We also saw large inflows into Source sector ETFs; over the last four weeks we have witnessed investors switching from traditional sector ETFs to the optimised sector products provided by Source. The sector themes were clear, with large investments in ETFs tracking the DJ Stoxx 600 Banks (SX7P), Basic Resources (SXPP), Construction and Materials (SXOP) and Retail (SXRP) indices.

We witnessed strong inflows into emerging markets ETFs such as those tracking India – the Lyxor ETF MSCI India (NYSE Euronext: INR), Lyxor ETF India S&P CNX NIFTY (LSE: LNFT) and db x-trackers S&P CNX NIFTY (LSE: XNIF) – and Turkey. The iShares MSCI Emerging Markets Index ETF (NYSE: EEM) in the US topped the chart, with over US$1 billion in inflows last week (the fourth consecutive week of inflows).

Brazil was also on the radar with the government issuing a 2% levy on all purchases of the Brazilian Real (the Bovespa index is up 108% year to date). There will be no impact on existing shareholders as the new tax only applies to future FX transactions; however, prospective investors will automatically face a 200 basis point rise in creation costs. Investors could therefore expect certain funds to trade at a premium to NAV on the secondary market as authorised participants will endeavour to reflect this cost increase in their quoted prices.

Finally, remember that the Tokyo Stock Exchange will be closed on Tuesday 3 November, which will affect all ETFs tracking Japan.

This report is not an offer to sell or a solicitation of any investment products or other financial product or service, an official confirmation of any transaction, or an official statement of LSPE.