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European Exchange-Traded Funds Planned


State Street Global Advisors of Boston is planning to launch a family of exchange-traded funds in Europe based on the European indices of Morgan Stanley Capital International of New York. State Street Global has a licensing agreement to use Morgan Stanley's sector indices, according to Liz Kennedy, a spokesperson for State Street Global.

Barclays of London and Merrill Lynch of New York have launched similar products, but the new State Street Global funds would represent the first family of funds that are both based on European indices and traded in Europe, according to Kennedy. Barclays, for instance, has two exchange-traded funds in the U.K. as well as other exchange-traded funds that track Morgan Stanley indices, but trade in the U.S., according to Christine Hudacko, a spokesperson for Barclays.

It has not yet been determined how many funds will be offered, but it will probably be between one and two dozen, according to Kennedy.

State Street Global believes it is an opportune time to introduce exchange-traded funds in Europe, according to Gus Fleites, principal and director of exchange-traded funds at the firm.

"We believe that the maturity of the market in Europe is one where these products will be very well received," said Fleites. "This is very timely. Most of the [new] funds are sector related and that will be particularly attractive to European investors. With the [advent] of the European Union, there's been a significant move away from home bias investing to looking at Europe as one market and to industry investing."

Not everyone believes, however, that the European market will be receptive to exchange-traded funds.

"I think people in Europe, quite legitimately, are very anxious to come out with something new to offer, some state of the art products," said Magnus Spence, director of Sector Analysis of London, a marketing research firm specializing in the asset management industry in Europe. "But I can say, after speaking with a large number of organizational users of fund products, that exchange-traded funds are rocket science to European investors. [ETFs] are far too sophisticated for them. They're well ahead of the learning curve." Spence said by organizational users, he meant the institutional market, the market that State Street Global is targeting.

"As with any market, there will be certain education that goes on and people will become more familiar with new products," said Fleites. "I think if you look at ETFs, you'll see that there is a demand from institutional investors in Europe. Until now, they haven't been able to invest in these types of products in their own markets and we feel they will embrace them aggressively."

State Street is not alone in its lack of understanding of the European market, said Spence.

"Our belief is that many firms don't fully understand the nature of the [European] market," said Spence. "They assume the market and its agenda is the same as in the US and it definitely is not. If [SSgA] genuinely think[s] that there is going to be a mass market for ETFs, they're very mistaken."

SSgA is confident in its move, however, because of its 10 years of experience operating in Europe - one of its investment management offices is located in London - as well as its success with exchange-traded funds recently introduced in Asia, said Fleites.

Other industry consultants said it was not clear how exchange-traded funds would fare in Europe.

"Europe is much more of a closed environment," said Geoffrey Bobroff, president of Bobroff Consulting of East Greenwich, R.I. "The popular media plays a big part of what happens in the U.S., but in Europe, the brokers and advisors really control the market and it's questionable whether or not they will embrace these types of products."

State Street Global worked with the American Stock Exchange to bring the first exchange-traded fund to the market in 1993 and currently manages 22 exchange-traded funds worldwide with over $31 billion in assets under management.