ETFs mass appeal in Europe is still doubted

In spite of the many common features of European offered ETFs and US ETFs, doubts remain as to the ability of the former to mirror the latter's

1 Morgan Stanley, Exchange-Traded Funds Strategies, August 19, 2004.

Table 9.1 Europe's iShares MSCI ETFs: change in TER (bps)

ETF

Ticker

Old TER

New TER

iShares MSCI Austria

EWO US

84

59

iShares MSCI Belgium

EWK US

84

59

iShares MSCI France

EWQ US

84

59

iShares MSCI Germany

EWG US

84

59

iShares MSCI Italy

EWI US

84

59

iShares MSCI Netherlands

EWN US

84

59

iShares MSCI Spain

EWP US

84

59

iShares MSCI Sweden

EWD US

84

59

iShares MSCI Switzerland

EWL US

84

59

iShares MSCI United Kingdom

EWU US

84

59

Average

84

59

Source: Morgan Stanley, February 1, 2005.

success. Critics believe that it is one thing to rival the United States in terms of the number of traded ETFs, but quite another to match the success in terms of AUM. For now, total ETF assets in Europe are only a sliver of the US numbers. Many reasons are advanced as to why the two figures will not converge any time soon, including competition from the futures market and market fragmentation.

European investors are generally considered more comfortable with futures than their American counterparts. For example, it is only recently that the ban on trading single stock futures has been lifted in the United States. Regulators justified the ban by arguing that just as individual securities are open to manipulation, derivatives constructed around them could also be manipulated to influence the price of the underlying stock. Given that several successful liquid futures already exist on many of the popular indexes tracked by European ETFs, experts have doubted the mass appeal of these funds in Europe. Not only are European investors more familiar with futures, but many believe that the latter carry lower transaction costs than ETFs.2 Of course, just as in the United States, increased competition

2 Although many experts advise to carefully weigh up the difference in costs. For example, Massoud Mussavian, director of equity derivatives and Jacques Hirsh, equity derivatives analysts, both at Goldman Sachs, advise investors to carefully assess the initial costs and holding costs associated with the two investment alternatives. For more detail, see "Counting the Costs: ETFs versus Futures," Financial Times Mandate, June 3, 2002.

could push ETF costs significantly lower once the market has reached sufficient depth. This is not to say that buying futures is easier in Europe. Just as in the US, one has to have an established relationship with a broker as well as considerable financial resources, since, unlike ETFs, futures cannot be bought in small denominations.

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