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In ETF Race, New Funds Come Before Assets


When State Street Global Advisors announced that it was planning to launch the first exchange-traded funds in Europe in October 2000, there was some skepticism in the industry as to whether or not ETFs had a place outside the U.S. at that point. However, firms wanting to secure ETFs on the limited number of indexes that exist worldwide, began launching the products left and right. Currently, with 102, there are as many ETFs outside the U.S. as inside and firms are planning to launch more later this year.

SSgA now has ETFs in Australia, Europe, and Canada and Hong Kong. Last week, the firm announced that it would administer and manage seven ETFs based on European sector indices for UNICO Asset Management. Barclays Global Investors, which sponsors the iShares series, now has more than 40 ETFs in Asia, Canada and Europe. In Germany alone, 14 new ETFs have been introduced so far in 2002 and 15 more are expected to launch in the coming months, according to Kathe Dodd of J.P. Morgan Investor Services.

Foreign Exchanges on ETF Hunt

The growth is not due merely to firms testing the waters by offering a variety of products. Foreign exchanges are eager to attract firms willing to launch ETFs on local indexes. Last year, a host of ETFs including SPDRs, DIAMONDS, iShares and HOLDRS, which were trading on the American Stock Exchange, began trading on the Singapore Exchange (SGX) creating the first global ETF trading network. And in January at a conference in New York, executives from the Tokyo Stock Exchange, Euronext Paris, S.A., Depository Trust & Clearing Corp. International and the Amex discussed the growing popularity of ETFs globally as well as recent developments that should spur further growth abroad.

The buzz about ETFs worldwide and the growing number of products may be exaggerating their success, however. While there are the same number of ETFs outside the U.S. as there are inside, the asset sizes are very different. ETFs outside the U.S. held $20.1 billion in assets as of the end of 2001, according to SSgA. Meanwhile, domestic ETFs held $70 billion. SSgA's SPDR accounted for $30 billion alone.

"We've definitely seen a proliferation of products that has preceded assets," said Mark Roberts, head of product strategy for BGI in its London's office.

What Gives?

So why are ETFs being developed so rapidly outside the U.S.? One of the reasons is that because there are only a certain amount of indexes that people care about, firms want to secure ETFs based on them, said Roberts.

"With ETFs, I think the general approach was for firms to get the best[indexes] locked down and just get the ETFs launched in advance," he said.

Also, while global ETF assets are much lower than those in U.S. ETFs, the growth rate abroad has been the same, and in some cases better, than the growth rate of the U.S. ETF market in its early years, Roberts said.

"Based on that, we have every reason to believe that the products will grow significantly in due time," he said.

The reason some may have doubted the products' success in Europe may be an underestimation of the willingness of foreign institutional investors to consider complex products, especially in Europe. After all, markets outside the U.S. are far behind the U.S. in terms of maturity, so some felt that ETFs would be an extremely tough sell.

"I can say, after speaking with a large number of [institutional] users of fund products, that exchange-traded funds are rocket science to European investors," said Magnus Spence, director of Sector Analysis, when SSgA first announced it was launching ETFs in Europe back in 2000. "[ETFs] are far too sophisticated for them. They're well ahead of the learning curve." Sector Analysis is a London-based marketing research firm specializing in the asset management industry in Europe.

Clearly, at least some investors in Europe have become comfortable with the notion of ETFs, though. Last week, Spence refuted what he had said last year and said that ETFs are not too sophisticated for European investors, but he added that most investors still won't choose to invest in products that are unnecessarily complex. Spence said that it is still too early to collect data on ETFs in Europe.

"Suffice to say, the ETF value proposition for investors is universal," Roberts said. "The flexibility they offer versus traditional funds is attractive to investors no matter where they are. It doesn't necessarily require a high degree of sophistication to see those advantages."