American counterpart far exceeds Europe in terms of assets under managements and the variety of offerings.
Why is that? What are the unique attributes to European ETFs?
Sep 2019 ~ 6 mins read
ETFs stands for Exchange Traded Fund. At its core, ETFs share many features of passively managed mutual funds. However, as its name “Exchange Traded” stands, it provides the benefit of being traded on an exchange like common stocks.
The phenomenal growth of ETFs were propelled for a few reasons
The broad range of ETFs offerings, with its superior transparency and eased market access, have offered institutional and retail investors a variety of investment choices by assets classes, geographic and sector exposures, investment styles, etc.
The ongoing debate of passive vs. active, as a result of subdued performance in active investment with its unjustifiable high fees, has prompted the switch to low cost passive investment vehicle, like ETFs.
ETFs proved to be useful building blocks for portfolio construction, for offering both broad and niche market exposure. Again, due to its ongoing product innovation, more and more active asset managers are looking for ETFs as a product wrapper to make the fund publically available for a range of investors.
In Europe, most ETFs are incorporated as Investment Companies, which domiciles in Ireland, Luxemburg, for various tax breaks benefits reasons. See ResearchHub .
ETFs will apply to list or trade on one or several stock exchanges in EEA countries before it becomes publicly tradable. To list and trade on an European exchange, ETFs need to meet listing requirement of the regional exchange, and satisfy the rules and procedures set out by the national regulators, an EEA Competent Authority.
For example to list and trade on London Stock Exchange, the funds have meet
— The underlying vehicle for the ETF is an open-ended investment fund
— The fund is FCA authorised or recognised e.g. UCITS
— The ETF is either settleable in CREST or Euroclear Bank, depending on the trading service utilised
For ETFs already listed in other EEA countries can apply for FCA recognition and be admitted to trade on London Stock Exchange Main Market, without obtaining a listing in UK. This cross-listing provides a cost-effective approach to make ETFs accessible to…
See our ResearchHub >> The Myth of ETF Regulation
However, multi-listing create segmentations and confusions in the European ETFs space.
There are total 3326 fund registrations in European, which create 7760 unique listings cross x major exchanges.
In comparison, there are around xx US domiciled ETFs listed on major US exchanges, NYSE, Nasdaq, BATS, etc.
Different Dividend and Currency Treatment
In addition, each fund comprises different shares classes with different right, features, terms and conditions, further increasing complexity. Often the different shares class created as a result of
- Distribution - Accumulating
- Unhedged - Currency Hedged
ETF priced and traded in the different currency to its base currency. On London Stock Exchange, it is possible to trade an ETF in multiple currency lines - GBP or GBX, EUR, USD.
Please read our ResearchHub how these three features impact an ETFs performance
Distributing or Accumulating? What is the impact on performance
What is currency hedged ETFs? Does it mater?
Except looking for the long names, ETFs can be uniquely identified by
ISIN: Allocated by the country of domicile. ISIN is unique to each ETF globally.
SEDOL: a unique instrument identifier allocated by the exchange
TIDM: Tradable Instrument Display Mnemonic (TIDM), also called ticker, comprises the three or four character identifier specific to the exchange.
ETFs with multiple currency lines require unique TIDMs and SEDOL code, however, the ISIN of the multi-currency line will be identical. ISIN and ticker are commonly used by investment platforms to uniquely identify ETFs.
See our ResearchHub >> How ETF different to Mutual Fund
Because of ETFs are exchange listed, it trades exactly like shares, many similar characteristics as shares do while mutual funds don’t, for example, intra-day pricing, real-time volume calculation and the ability to trade anytime during the market open.
ETFs is a passive investment, whose allocation tracks the underlying index outlined in investment objectives. There are a small number of actively manged ETFs gained regulatory approval, in this case, the portfolio manager takes active investment decisions and look to outperform the market.
Index-tracking funds tend to have lower cost than actively managed ETFs, as their goal is to solely replicate the performance of the index. Whether the higher fee charged by the active investment is justifiable to its performance is an ongoing debate. Before investing in any active funds, investor should thoroughly analyse investment strategy, portfolio manager’s styles and past performance. Similar to ETFs, investors should investigate underlying index styles, holdings, liquidity and cost, before making any investment decisions.
See our ResearchHub >> What parameters to look at when invest in ETF
An index is a collection of securities intended to represent a given market or market segment. Index are constructed and calculated to measure the performance against different geography, sector, styles or yields. Each index has its own methodology established by index providers, and index follows the rules set out by the methodology including
· Securities eligibility criteria: often measured against securities market cap or traded volume
· Number of holdings: number of eligible securities included in the index
· Weightings: Market cap weight, equal weight or tilted against income, quality or other factors.
· Rebalance frequency: quarterly, semi-annually that index reweight to its default settings.
The term ETFs is belong to a broad umbrella ETP (Exchange Traded Products), which covers different investment including ETFs, ETCs (Exchange Traded Commodities or Currencies) and ETNs (Exchange Traded Notes). Depending on the type of the underlying securities, ETFs can be segregated into a few types
Equity ETFs: The underlying securities are stocks in developed and emerging market.
Fixed Income ETFs: The underlying securities are government bond, corporate bonds, Inflation protected bonds, Agencies (including mortgage-back or assets-backed bonds), Convertibles, CDS or others
Commodity ETPs: The underlying securities are precious metals, energy, base metals or agricultures. Except gold, where ETFs can possibly hold gold bars, all other commodities are held via derivatives, e.g. futures or notes. Commodity ETPs are often structured as ETCs or ETNs
Currency ETPs: The underlying securities are individual currency pairs, (e.g. GBP/USD, JPY/EUR) or a basket of currencies (G10 currencies or commodity nation currencies). Currency ETPs are often structured as ETCs or ETNs.
Structured ETPs: Structured ETPs often involves the leverage or inverse leverage, where the ETP return a multiplication of the underlying indices’ returns, in the same or opposite direction. Structured ETPs often sort the ETN structure.
Alternative Assets Class: This include ETFs invest in every other assets class, Real Estate, Private Equity, Hedge Fund, and the volatility - VIX index
Multi-asset ETFs: ETFs holds more than one type of assets class, for example, ETFs allocate to Equities, Fixed income, and … in xxxx
See ResearchHub - The difference between ETF, ETN and…
Within each asset class, ETFs have different focus and investment styles,
See our ResearchHub >> The difference between ETFs, ETCs and ETNs, and why are try structured differently?