Will this dynamic sector overtake the U.S. fixed-income ETF market in 2008?
We start this week with a table from the recent Deutsche Bank research report* on European and U.S. fixed-income ETF liquidity trends, showing the top 15 European fixed-income ETFs by assets under management.
Figure 1. Top 15 European Fixed-Income ETFs By AUM
One of the first things to note about the European fixed-income ETF sector is that proportionately it is a larger part of the overall ETF market than is the case for the U.S. In my first feature for IndexUniverse.com, I noted that fixed-income ETFs represent 16% of the overall ETF market in Europe, compared with 6% in the U.S. This reflects a long-standing bias towards a higher fixed-income weighting in the portfolios of (continental) European investors, whereas investors in the Anglo-Saxon countries have tended to favor equities. Other factors may also play a role-more on this below, in the discussion on money market ETFs.
The authors of the Deutsche Bank report, Nizam Hamid and Yvonne Sandford, also point out that European fixed-income ETF turnover, at around euros 300 million a day, is not far short of U.S. fixed-income ETF turnover, which they estimate at around euros 470 million a day. On the asset front, European fixed-income ETF funds total just under euros 20 billion, not far short of the U.S. total of around euros 27 billion (see Figure 2 below). So, by almost all measures, the European fixed-income ETF market is of an equivalent scale to its U.S. cousin.
What is noticeable in the chart of assets under management growth is an acceleration of asset gathering during the last few months, particularly in Europe. This is great news for the fixed-income product providers and no doubt reflects some flight to safety from equities during the recent sell-off. ETF design has long been focused on the equity markets, and it is encouraging to see the move into other asset classes develop apace.
Figure 2. Fixed-Income ETF AUM - Europe And The U.S.
Source: Deutsche Bank. Reuters
Money Markets Take Off
So where have fixed-income ETF assets been focused?
Figure 1 shows that the largest two European fixed-income ETFs track the EONIA money market index, in offerings from db x-trackers and Lyxor. The fifth-largest ETF in the table is also a money market ETF, from BBVA in Spain. In fact, money market funds represent over 25% of all European fixed-income ETF assets, with short-maturity bonds a further 20%.
Figure 3. Fixed-Income ETF AUM By Sector - Europe
Source: Deutsche Bank. Reuters
Figure 3 shows how money market ETFs have gone from a standing start to representing the largest European fixed-income sector in a matter of months. No doubt this has something to do with the fact that there has been a great deal of strain in money markets since last summer, with commercial rates (LIBOR, EURIBOR) trading at levels sharply higher than official rates, and so investors in the money market ETFs have had an easy way of accessing these higher rates. The relative strength of the euro has no doubt also helped to attract funds. Nevertheless this is a remarkable growth rate and has represented a great success for DB, Lyxor and BBVA.
Incidentally, it is noticeable that there are no equivalent funds in the U.S. market, perhaps due to the still-dominant position of other types of money market funds. Some of these, as we know (for example, those linked to auction-rate securities or relying on mortgage-backed securities for extra yield), have run into problems in recent months, and have faced capital losses or even freezes on withdrawals. This is surely an opportunity for U.S. ETF product providers, although the low level of U.S. interest rates (which are now below the inflation rate) may affect demand for the time being.
[The Bear Stearns Current Yield Fund (AMEX: YYY) is the closest thing U.S. investors have to a money market fund, but it is not a true money market portfolio; instead, it has a variable duration that can stretch out to 180 days at the portfolio manager's discretion.]