European ETF AUM to exceed $500bn by end of 2012

The European ETF industry is expected to exceed $500bn in assets under management (AUM) by the end of 2012, according to BlackRock.

The firm's global head of ETF Research and Implementation Strategy Deborah Fuhr predicts an annual 30% rise in ETF AUM over the next few years.

Europe experienced a compound annual growth rate of 90.5% in ETF assets over the past decade through year end 2009.

This figure substantially exceeds the 58.1% growth rate in the US and 56.3% achieved globally in the same time period, showing burgeoning investor demand for ETFs in Europe.

Fuhr says: "With greater awareness of risk management, many investors have found that ETFs, which are structured as funds, meet their desire for greater transparency in relation to cost, investment holdings, liquidity, risk and return."

She predicts the preference for core beta ETFs such as funds tracking broad market indices will continue, despite the growth in usage of funds covering alternative asset classes.

She says: "Since no single sector, style or stock consistently outperforms its peers, having core holdings invested in broad market indices not only helps reduce volatility but also can achieve competitive returns for the overall portfolio."

Fuhr also predicts substantial growth across both institutional and retail investor segments, as ETFs will continue to be the preferred investment vehicles for low cost beta exposure.

She adds: "Regulatory changes such as the Retail Distribution Review seeking to ban commission in the UK retail market will have a significant impact on ETF usage in the next 18 months and we are seeing globally, the growth in institutional usage of European Ucits ETFs."

However, Fuhr warns of potential risks stemming from funds or other investment products being labelled ETFs when they do not have with the fundamental features of ETFs.

For example, some so-called ETFs do not provide transparency on their underlying portfolios, do not offer in-kind creation and redemption and do not have real time indicative net asset values.

Fuhr says now the industry stands at over $1trn, product developers are seeking to find ways of putting structured products, hedge funds and active funds into an ETF wrapper without maintaining the aforementioned basic features of an ETF.

Yet if this continues, the industry risks confusion, disappointment and disillusionment among investors.

She says: "ETFs are one of the greatest financial innovations of the last decade in Europe and we expect a bright future but the industry is at a critical crossroads.

"Clarity is critical if the industry is to help investors understand the structure, mechanics, tax and regulatory implications of using ETFs. Agreeing definitions for the various product structures is one of the pressing needs of the industry in 2010."