Thomson Reuters Lipper highlights product segments most at risk of ETF closures

Dec 7th, 2016 | By | Category: ETF and Index News

In a new report, Thomson Reuters Lipper has identified the ten least popular asset classes in Europe and the handful of ETFs within each that are at risk of closing down.

Thomson Reuters Lipper highlights ETF asset classes most at risk of closure

Detlef Glow, Head of EMEA research at Thomson Reuters Lipper.

Detlef Glow, Head of EMEA research at Lipper, said: “Some funds in the European ETF market are quite low in assets and may face the risk of being closed in the near future. They are obviously lacking investor interest and might therefore not be profitable for the respective fund promoters.”

While there are plenty of asset-rich exchange traded funds listed in Europe, there are many more struggling to attract significant investor demand.

Part of the explanation lies in the fact that the European ETF industry is relatively concentrated – there are more than 2,000 listed ETFs in Europe, but only 108 funds have more than €1bn in assets. These ETFs account for €279.1bn or 57.7% of the overall assets.

Mainstream exposures (US, European and global broad market equities, for example) generally attract significant interest from investors; however, there are also hundreds of funds that are trailing in assets, mostly due to exotic underlying investments and higher fees.

The least three popular asset classes were bond ETFs denominated in Turkish Lira, money market ETFs denominated in Singapore dollars, and United Arab Emirates equity ETFs, which claim around €2m combined. There is just one fund invested in each asset class.

“[They] are quite exotic asset classes for European investors, so it is not surprising that these asset classes are not so well populated and do not attract a lot of investor interest,” Glow said.

Also on the least favoured list is emerging market global corporate bonds, which hold around €2.5m in assets. There are only $38bn worth of assets invested in all types of emerging market debt ETFs in the world, out of a fixed income total of $610bn. Despite a higher yield during an era of low returns, investors have withdrawn from emerging market bonds and equities as Chinese growth slows, the US contemplates interest rate hikes and Donald Trump proposes a more isolationist set of trade and energy proposals.

ETFs tracking Israel or Kuwait equities do not fare well on the list either, holding a total of around €9m. There is only one Israel-focused ETF – the iShares TA-25 Israel UCITS ETF (LON: TASE) which launched in January 2016. It costs 0.60%. For Kuwait, there is again only one fund – the Lyxor UCITS ETF Kuwait (FTSE Coast Kuwait 40) USD (LON: LKUU). It launched in 2007 and costs 0.65%.

A likely explanation for these funds failing to significantly get off the ground lies in the availability of regional or thematic ETFs offering similar risk profiles but greater diversification than single country funds. These ETFs would naturally be preferred by investors looking to better minimise idiosyncratic risk. For example, Kuwait makes up almost 16% of the $76m db X-trackers S&P Select Frontier UCITS ETF (LON: XSFD). It costs 0.95% and is up more than 23% year to date in USD terms. The top country investment is 29.9% in Argentina, then Kuwait, followed by 13.2% in Vietnam and 13% in Pakistan.

Mixed asset ETFs, coming in next on the list, have just €13m assets between them, found Lipper. There are nine funds available in these sectors, from db X-trackers, SPDR ETFs, UBS, Think ETFs and Commerzbank.

The ease of tradability of ETFs means that investors are easily able to create bespoke portfolios composed of a range of bond and equities ETFs, and can do so cheaply, rather than pay as much as 0.72% in fees for the €268mn db X-trackers Portfolio Total Return UCITS ETF (Xetra: XQUI). This offers a potential explanation for the lacklustre gathering of assets in mixed asset ETFs.

Small and mid-cap French equities were the ninth least popular asset class. The Lyxor CAC MID 60 UCITS ETF (Euronext Paris: CACM) was launched in 2011 and costs 0.50%. More liquid and diverse European equity ETFs have more assets, like the €408mn iShares STOXX Europe Small 200 UCITS ETF (Xetra: SCXPEX) which costs just 0.20%. More than 12% of the fund is invested in France, after the top holding of 28.9% in the UK.

The tenth least popular asset class is euro-denominated medium-term bonds. There is only one fund in this category, the ComStage iBoxx EUR Germany Covered Capped 3-5 TR UCITS ETF (Xetra: C541). It launched in 2010 and costs 0.32%.

In terms of the three most popular ETF asset classes in the third quarter in Europe, US equities is at number one with more than €70bn, followed by eurozone equities at almost €40bn and global equities with just over €30bn. At the start of the fourth quarter, this trend continued. Global ETF investors poured $8.1bn into US equities and $3.6bn into emerging market equities in October alone, the two most popular segments for that month, found BlackRock.

Tactical investors are increasingly turning to ETFs to quickly establish a position in, or lower exposure to, a specific asset class in response to new information. This ability has facilitated a more cost efficient method of effectively managing their allocations in a top-down portfolio allocation strategy. ETFs tracking major asset classes (such as broad US equities, European equities, emerging markets, gold, global high yield etc.) as well as sector-based ETFs are best suited for this play, adding further explanation for their popularity as well as relatively higher trading figures each month.

Asides from asset class preferences, another part of the explanation why there are so many ETFs with so few assets in Europe lies in the fact that the industry is very concentrated. There are more than 2,000 listed ETFs in the continent, but only 108 funds have more than €1bn each. These funds, in fact, account for €279.1bn or 57.7% of the overall assets.

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