An Overview Of European Equity ETFs

April 14, 2008

Will the overall stalling both of European ETF asset growth and emerging markets produce a spate of new inverse products?

Following on from my recent articles for IndexUniverse.com, on the European market in general, and on the top 10 ETF providers, in this feature I will focus in greater detail on equity ETFs in Europe.

Below is a table of the top 15 European equity ETFs by assets under management, taken from the 11 March Deutsche Bank "ETF Liquidity Trends" report.

 

Top 15 European Listed Equity ETFs by AUM*

 

ETF Name

 

Issuer

 

ER

 

Domicile

 

AUM

(Em)

 

Lyxor ETF DJ EURO STOXX 50

 

Lyxor

0.25%

Fra

4,552.17

iShares DJ EURO STOXX 50

 

BGI

0.15%

Ire

3,704.31

iShares DJ EURO STOXX 50 (DE)

 

BGI (Deutschland) AG

0.17%

Ger

3,640.00

Lyxor ETF CAC 40

 

Lyxor

0.25%

Fra

3,118.17

iShares DAX (DE)

 

BGI (Deutschland) AG)

0.17%

Ger

2,893.28

XMTCH on SMI

 

Credit Suisse AM

0.38%

Swit

2,422.01

iShares S&P 500 Index Fund (IUSA)

 

BGI

0.40%

Ire

2,148.41

iShares FTSE 100

 

BGI

0.40%

Ire

2,049.97

db x-trackers MSCI Emerging Markets TRN Index ETF

 

db x-trackers

0.65%

Lux

1,628.80

db x-trackers DJ EURO STOXX

 

db x-trackers

0.15%

Lux

1,248.33

iShares MSCI Japan

 

BGI

0.59%

Ire

1,104.69

EasyETF CAC 40

 

AXA IM / BNP Paribas

0.25%

Fra

1,033.02

iShares Dow Jones EURO STOXX Select Dividend 30 (DE)

 

BGI (Deutschland) AG

0.32%

Ger

936.56

iShares MSCI Emerging Markets

 

BGI

0.74%

Ire

810.33

SPDR Europe 350

 

Crédit Agricole AM

0.35%

Ire

774.36

 

 

The DJ EURO STOXX 50 index is the basis for the most popular European ETF - featured in four versions in the European top 15, with offerings from Lyxor, iShares (Irish and German versions) and db-xtrackers' Luxembourg-listed fund. Note the variation in fees (from 15-25 basis points) for essentially the same product - with Lyxor's higher-priced French offering presumably reflecting the sponsor's captive client base within the country. Fee-wise, the DJ EURO STOXX 50 ETFs are still slightly more expensive than the equivalent U.S. market leader (the S&P 500 SPDR [AMEX: SPY] is priced at 9.45 bp and the iShares S&P 500 ETF [NYSE Arca: IVV] at 10 bp).

If the EURO STOXX 50 Index fund has gained in popularity as the easiest way of tracking the largest Eurozone companies, the terrible start to the year for equity markets in 2008 has highlighted some of its potential inadequacies. At year-end 2007, over 32% of the DJ EURO STOXX 50 Index was represented by financials, and these have borne the brunt of the equity sell-off year-to-date, contributing to a fall of around 18% for the overall index in the first quarter. Although the S&P 500 index's financials weighting is also high - just over 20% at a recent measure - it is clearly more diversified as a broad market proxy than the EURO STOXX 50.

During the 2003-2007 bull market, this possible imbalance was not of great concern to investors, but it stands out as a concern amidst the current market volatility. So what have European equity ETF providers done to help investors avoid the potential pitfalls of capitalization-weighted indexes?

The most popular non-cap-weighted equity ETF is the iShares DJ EURO STOXX Select Dividend 30, which comes in at No. 13 in the top 15 list. Unfortunately for its holders, this fund has done little better than the EURO STOXX 50 in the first quarter of 2008, losing 16% - and its year-on-year performance is even worse, with an index price change of -21%, compared with a decline of 13% in the EURO STOXX 50 Index. The culprits here, again, are European financial stocks, which represent nearly half the dividend-weighted index. We can see the same trend in the U.K., where investors in the iShares FTSE Dividend Plus ETF, the third-largest noncap-weighted European fund, have lost nearly 30% over one year, as high dividend yields have done little to pacify concerns over the health of financial sector stocks. This is a classic bear market error - to rely on dividends for portfolio protection when they may be cut. Few probably expected the rout in high-yielding stocks to be as bad as it has been.

As an alternative to the focus on dividends, there has (unsurprisingly) been a spate of new launches in the fundamental indexation space, with PowerShares starting in November last year, and Lyxor adding four funds based on the RAFI fundamental indexes in January 2008. These funds added competition for Swedish-based XACT, the first European ETF manager to embrace the "fundamental" route. Interestingly, both Lyxor and PowerShares pitched total expense ratios for their RAFI offerings at 75 bp, 10 more than the XACT FTSE RAFI Fundamental Euro, presumably expecting that investors would prefer their versions to buying a Swedish-listed fund. Here is another example of the fragmentation of the European market preventing direct competition on costs (for purposes of comparison, the PowerShares FTSE RAFI US 1000 ETF in the U.S. has an ER of 60 bp). It will be interesting to see, going forward, how the new fundamental index funds compare performance-wise with their cap-weighted counterparts, and how they fare asset-wise. So far the funds raised for fundamental indexation products have been relatively modest, but these are still early days.

Elsewhere in the European equity ETF market, and returning to more traditional, capitalization-weighted products, it is interesting to note the relative heterogeneity of providers of country ETFs with the dominance of two or three providers in the pan-European sector space.

As far as country ETFs are concerned, we have a long list of managers who dominate either through first mover advantage, or a presence in the "home" market - Lyxor (Belgium 20), iShares (DAX, FTSE 100), Flame and BBVA (IBEX indexes, Spain), DNB (Norway OBX), XACT and Seligson (OMX Helsinki 25), XACT (OMXSB, Sweden) and XMTCH (SMI Index, Switzerland). European country funds are an important part of the overall European ETF equity market, representing five of the top 15 places in the table above.

By contrast, the pan-European sector indexes, which are typically based on the components of the DJ Stoxx 600 Index (although StreetTracks, the State Street subsidiary, runs competing funds based on the MSCI indexes), are dominated by iShares and Lyxor. Deutsche Bank has recently launched competing ETFs for some of the DJ Stoxx 600 sectors, but in terms of assets, it is still some way behind the big two.

Four of the top 15 from our table are equity ETFs covering world markets - the iShares S&P 500 index ETF and the iShares MSCI Japan ETF; and two funds tracking the MSCI Emerging Markets Index, from iShares and db x-trackers. Though outside the table, Lyxor has taken significant asset share in some emerging markets, notably its Eastern Europe ETF and its India and Russia country funds.

Finally, as I write this at the end of one of the worst quarters for equities in years, I should pay tribute to those providers who have had the foresight to offer funds with inverse exposure. Deutsche Bank x-trackers runs the largest European inverse ETF, with its shortDAX fund, and has another euro 150 million ETF offering inverse exposure to the EURO STOXX50 index. And Société Générale (SGAM), though ranked a lowly 15th in the overall table for assets under management, is the only European provider to offer double inverse equity funds, with its suite of 100%, 200%, -100% and -200% ETFs on the French CAC 40, Italian S&P MIB and DJ EURO STOXX50 indexes.

Since equity markets took a turn for the worse since last summer, overall European ETF asset growth has stalled (even if the bond and commodity sectors are doing well). It will be interesting to see how product providers cope with the recent market environment - will we see a spate of new inverse products? There is an obvious gap in the inverse sector space, where ProShares has done so well in the U.S. market. And with the emerging market boom now also in reverse, will we see more options for those wanting to take a bearish view there as well? Watch this space!

 

* Source - Deutsche Bank, ETF Liquidity Trends, March 11, 2008

 


Paul Amery is the European correspondent for IndexUniverse.com. He can be reached at [email protected].

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