Exchange Traded Funds – Financial Experts See Further Potential for Exchange Traded Funds

Particularly owing to their comparably low transaction costs and great flexibility, exchange traded funds (ETFs) have the potential to further increase their fast-growing market share on the German fund market in the coming years.

These are the findings of a survey among 249 financial market experts conducted by the Centre for European Economic Research (ZEW), Mannheim, as part of the ZEW Financial Market Test. The experts were asked if the ETF share of the total asset of investment funds in Germany would grow over the next years. 52 per cent estimate a moderate and 39 per cent an even substantial increase. The experts have thus certified that this financial instrument, which Germany had imported from the USA at the beginning of this decade, still has significant potential because even slightly higher proportions represent a very strong growth in the ETF branch, which currently performs at a low level displaying a share of 56 billion euros of the overall asset of investment funds in Germany.

ETFs describe as precisely as possible an already existing index referring to a branch or a country such as the DAX. They differ from conventional investment funds as they are traded on the stock market and do not require active fund management. About 37 per cent of the interviewed financial market experts consider low costs to be the greatest advantage of ETFs. When purchasing ETFs, the investor only needs to pay the usual transaction costs. There is no initial sales charge and the annual management fee consists of a mere fragment of the fee for conventional active funds.

According to the analysts, the flexibility (31 per cent) and transparency (23 per cent) can also be considered advantages of ETFs. As expected, just a minority sees a considerable benefit in ETF performance as, by definition, it can only be as high as the index being represented and serves as a benchmark. However, studies have shown that a major part of actively managed funds is not able to keep up with the benchmark in the long term and thus performs worse than ETFs.

The experts were also asked if ETFs were likely to prevail among private investors in a market predominated by institutional shareholders. Here again, the responses were positive. 62 per cent of the experts expect exchange traded funds to gain slightly or significantly more importance for private investors. Furthermore, a majority of 81 per cent estimates that the market of fund providers will consolidate in the coming five years.

Contact

Dr. Sandra Schmidt, E-mail s.schmidt@zew.de