Weekly European ETF Trading Report

December 08, 2009

European ETF trading commentary for the three weeks ending 4 December, provided by LaBranche Structured Products Europe (LSPE).

The equity market has gained 6% since early November and ETF assets have increased significantly. Our creation/redemption ratio in the primary market over the last four weeks was 11:4 in favour of creations and we saw a modest €400 million in net inflows. In the secondary market, buyers slightly outweighed sellers.

Thanks to very good two-way OTC flows, LSPE was able to trade with tight spreads in emerging market and corporate bond ETFs. We witnessed large creations in the iShares FTSE BRIC 50 (LSE: BRIC), iShares MSCI Emerging Markets (LSE: IEEM) and Lyxor ETF MSCI EM Latin America (NYSE Euronext: LTM), which attracted more attention than  ETFs tracking Brazil, such as the Lyxor ETF Brazil Ibovespa (NYSE Euronext: RIO) and iShares MSCI Brazil (LSE: IBZL), which were affected by the surprise 2% tax applied to FX inflows. This is consistent with the bullish comments we have seen from analysts on all emerging market assets (based on momentum and capital flows).

Despite this, overall ETF volumes contracted towards the end of November due to the effect of the Middle East crisis on emerging market ETFs. We witnessed decent two-way orders in the iShares MSCI World (LSE: IDWR) on the back of tactical asset allocation and transition management orders. Meanwhile, China ETFs such the Lyxor ETF China Enterprise HSC (NYSE Euronext: ASI) and iShares FTSE/XINHUA China 25 (LSE: FXC) have been on a rollercoaster ride over the last two weeks on government fears that banks in the region will need more capital.

ETF Securities’ commodities ETPs have seen huge creation orders and LSPE was active in the Gold Bullion Securities Ltd fund (LSE: GBS) and the ETFS Physical Gold (LSE: PHAU), ETFS Physical Platinum (LSE: PHPT) and ETFS Physical Palladium ETCs (LSE: PHPD). With gold and other precious metals prices setting new records daily, some large percentage increases in volumes in November have helped ETF Securities’ assets under management to a record high.

Last month, LSPE also witnessed a very large OTC sell order in index-linked ETFs – the iShares GBP Index Linked Gilt (LSE: INXG) and iShares $ TIPS (LSE: ITPS) – of over £125 million. However, the US-listed iShares Barclays TIPS Bond Fund (NYSE: TIP) was in strong demand and had decent creation orders. This suggests that certain fund managers in Europe believe that inflation fears are receding.

In corporate bonds, we saw large investments in euro-denominated products such as the iShares Barclays Euro Corporate Bond ETF (LSE: IEAC) and iShares Euro Corporate Bond ETF (LSE: IBCX) with above-average volumes both on- and off-exchange. Keep an eye on these ETFs: the ongoing demand in the corporate bond markets and demand for the relevant ETFs is still pushing prices up and yields down, limiting the scope for future capital growth. Meanwhile, the iShares JPMorgan $ Emerging Markets Bond Fund (LSE: IEMB) and its US-listed version (AMEX: EMB) have drawn attention as it seems that investors were willing to sell their US product in favour of the Dublin listing.

Finally, telecom has been the most high-profile sector, gaining 8% in the last three weeks with off-exchange trading well above normal levels.

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.

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