March 26, 2013 6:35 pm

Large spike in ETF usage predicted

Two-thirds of European investors expect to increase their usage of exchange traded funds, with ETFs predicted to experience much stronger growth than competing financial instruments such as futures, index funds and total return swaps, according to the Nice-based Edhec-Risk Institute.

The latest Edhec-Risk European ETF survey found that just 4 per cent of investors said that they expected their usage of ETFs to decrease while 67 per cent predicted increased use.

European investors’ use of ETFs to invest in commodities, corporate bonds, real estate and infrastructure all rose strongly in 2012 compared with the previous year’s survey, suggesting ETF’s penetration into asset classes beyond equities is continuing to increase.

Speaking at the institute’s conference in London on Tuesday, professor Nikolaos Tessaromatis said the strength of investors’ preference for ETFs over other financial instruments was striking.

In comparison, only 28 per cent of those surveyed expected their use of futures to rise while 9 per cent said they expected a decline.

Total return swaps, which are derivative instruments traded in bilateral over-the-counter deals, appear to be declining in popularity with just 11 per cent predicting increased usage and 30 per cent expecting their usage to fall.

Investors’ views were balanced on expected usage of index funds which are generally cheaper than ETFs. Just over a quarter (26 per cent) said they expected their usage of index funds to increase while just under a quarter (24 per cent) said their usage would decline.

Professor Tessaromatis said ETFs and futures were perceived to have an edge over total return swaps and index funds in terms of liquidity, transparency and cost.

“So it would come as no surprise if ETFs and futures were to take further market share from index funds and total return swaps,” said professor Tessaromatis.

Sensitivity towards costs among investors appears to be on the rise. The total expense ratio was cited as the most critical attraction of an ETF by 68 per cent, up from 61 per cent in the previous year’s survey.

“Respondents are scrutinising costs more strongly within ETFs, even though they are already a comparatively low-cost vehicle,” said professor Tessaromatis.

The choice of underlying index, cited in the 2011 survey as the most important factor when choosing an ETF, slipped back into second place behind costs in order of importance for investors.

But investors’ awareness of the importance of choosing the right underlying index when buying an ETF supported the increased scrutiny of being directed towards financial indices, particularly those used in Ucits funds, by the European Securities and Markets Authority (Esma), the regional regulator and the European Commission, said professor Tessaromatis.

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