In an investment arena where big is beautiful, the biggest are now bigger than ever before. European assets under management (AuM) in exchange traded products (ETPs) have soared to a record high of €267.05bn (£216.92bn) in the third quarter of this year, with the largest 10 ETFs accounting for 24.54 per cent of AuM, and the top five ETF promoters making up a massive 76.16 per cent of the overall AuM, Lipper research has revealed.
Size matters when it comes to funds, but investors are being warned not all of 2012's emerging ETF trends will be good for them. Lipper's report, titled 'ETFs: Recent trends and the challenges ahead' says ETFs on bond markets and strategy indices may become the key driver for future growth. And, proportionately, it is the fastest-growing asset class this year, with 42 new funds launched in 2012 alone, meaning there are now more AuM in newly launched bond funds (47 per cent) than in newly launched equity funds (26 per cent), or any other asset class. Shattered by the rockiness in Europe, a raft of investors have lost their appetite for risk and are piling into such funds. But analysts are warning this could, in fact, be a dangerous move as when interest rates rise, those invested in bonds will feel the most pain.
Peter Sleep, senior portfolio manager at Seven Investment Management, says he's currently very cautious about bond ETFs. "A lot more of these funds have come to the market because investors are feeling risk-adverse, but when you consider six-month gilts with a measly yield of just 0.4 per cent at the moment, it's actually quite risky to invest in them."
And an ever greater number of niche investments have become available to investors this year, including volatility reducing ETFs and 'smart beta' products that come highly recommended by a number of investment professionals.
Smart beta offers better diversification by weighting stocks using alternative measures, for example, measuring economic footprints rather than share prices to avoid 'glamour stocks' such as Apple. Mr Sleep says: "It takes human emotion out of the process and helps eliminate inefficiencies in the market."
He recommends iShares, Lyxor and Ossiam as providers with promising smart beta offerings.
As the ETF market crowds out further, competition for investors' capital is hotting up. This has caused fees to "head south" this year, which can only be a positive thing for investors. "But prices can only go so low," warns John Fletcher, head of exchange traded products at Charles Stanley. "So the falling prices we've seen this year are more likely to plateau next year." And the Lipper report concludes there will be no "price war" in the foreseeable future.
Detlef Glow, head of EMEA Research at Lipper and author of the report, predicts a number of ETF promoters are likely to leave the market in 2013, following Credit Suisse's departure and ETF Securities' attempted sale this year. Mr Sleep believes those most likely to leave the market will be Swiss-based, but also predicts a number of new entrants to the market. Speculation around BNP Paribas's intentions to grow its ETF business is mounting after it made several hires in the UK in recent weeks, but its funds would have to gain UK reporting status in order to become viable for UK investors.
And Mr Fletcher says smaller funds are the ones most likely to close. He says new funds (those that have been around less than three years) and with less than £100m under management are in the "danger zone" and should be avoided.
Going forward into 2013, the Lipper report suggests retail platforms will become an important sales channel for ETFs and also predicts an increase in the use of ETFs within actively managed funds.
Barclays Stockbrokers Top 10 ETF buys and sells in 2012*
| Top 10 Buys | % Share | TER (pa) |
| ETFX FTSE 100 Super Short Strategy (2X) | 12.73% | 0.60% |
| iShares FTSE 100 Nav | 12.69% | 0.40% |
| ETFX FTSE 100 Leveraged (2x) | 5.95% | 0.50% |
| iShares S&P 500 Nav | 4.55% | 0.40% |
| iShares FTSE UK Dividend Plus | 3.93% | 0.40% |
| iShares MSCI Emerging Markets | 2.54% | 0.75% |
| Db X-TrackersFTSE 100 Short | 2.41% | 0.50% |
| iShares FTSE 250 | 2.32% | 0.40% |
| iShares iBoxx GBP Corporate Bond Fund | 1.82% | 0.20% |
| iShares Index Linked Gilts | 1.61% | 0.25% |
| Top 10 Sells | % Share | TER (pa) |
| ETFX FTSE 100 Super Short Strategy (2X) | 15.52% | 0.60% |
| iShares FTSE 100 Nav | 14.29% | 0.40% |
| ETFX FTSE 100 Leveraged (2x) | 7.70% | 0.50% |
| iShares S&P 500 Nav | 3.36% | 0.40% |
| iShares FTSE UK Dividend Plus | 3.04% | 0.40% |
| Db X-TrackersFTSE 100 Short | 2.82% | 0.50% |
| iShares iBoxx GBP Corporate Bond Fund | 2.55% | 0.20% |
| iShares Index Linked Gilts | 2.33% | 0.25% |
| iShares FTSE 250 | 2.25% | 0.40% |
| iShares FTSE/Xinhua China 25 | 1.78% | 0.74% |
Source: Barclays Stockbrokers, * to end of November 2012
