Eye on ETF's

Exchange traded funds are front of mind in our industry given the current rate of product development and their ability to capture significant inflows of investment dollars world-wide.  Some timely research and analysis of the ETF market caught our eye this week: 

1. ETF market share v. expenses ratio analysis (via Reuters) - Felix Salmon brings us some interesting nuggets on ETF adoption compared to expense ratios. His analysis illustrates the strength of large, established brands and how herd mentality may actually work in favor of the end investor in this asset class.  It will be interesting to see how Fidelity's recent re-launch into ETF's plays out in comparison.  Are they too late?
2. Synthetic ETF's on the Endangered List? (via STM) - ETF's that use swaps and other derivative products to create their investment vehicles as opposed to traditional ETF's that are based on baskets of physical securities are under serious pressure from EU regulators, the one market where investor adoption has been wide-spread.  While synthetic ETF's may be 'cheaper' in the current environment, look for additional collateral requirements to place a significant strain on the cost of running these products in the near-term. The question is will the overall effect on cost be enough to flip European investors back to physical ETF's?

Synthetic ETFS have not made much of a dent here, amounting to about 3% of the market in the United States. They have not fared much better in Asia, where they account for 11% of assets placed in ETFs. But in Europe, they’ve been hugely popular. By Celent’s calculations, their share of the overall European ETF market rose from around 21% in 2005 to more than 45% of the value of funds in 2011.

Note: As a technology and operations-oriented consulting firm, Citisoft's clients are asking us for more and more help managing the data, tools, and processes to support ETF product development while keeping costs in check. Please contact us for more information.