| efm: After years of rapid growth, worldwide ETF volume fell for the first time in Q1. Have index funds exhausted their potential?
Graf: The ETF market is going through a difficult phase right now. On a global basis, growth is not comparable to what we have seen over the last few years. In the US and Europe, a few ETFs are being withdrawn from the market. Looking more closely at Asia and Europe however, the ETF market remains as active as ever. New market regions like the Middle East are poised to take off. And a number of highly innovative products are drawing increasing investment.
efm: The increasing number of ETFs is creating some confusion for investors. Whether there is enough demand for new investment concepts is also being questioned. Are there too many ETFs?
Graf: Solely in terms of quantity, the 500 ETFs we have in Europe as compared to 50,000 European investment funds and 300,000 structured products in Germany alone seems like a rather low number. Looking at ETF quality, however, there are big differences, even among products involving the same or similar regions, sectors and strategies.
| efm: What exactly are the differences?
Graf: Investors employ ETFs for a wide range of reasons, from short-term liquidity management to long-term allocation in core strategies. Investment decisions are often based on fee structure, technical implementation, and tracking error considerations. Because ETFs track indices 1:1, index selection is a key success factor.
efm: Is it the case here that “quality pays for itself”?
Graf: Take this example: There are now a number of different competing Russian indices and ETFs. These indices are quite different, however, as regards their focus and orientation. This accounts for the significant differences in annualized performance between these concepts over the last seven years, on the order of 10 percent or more. That gets investors’ attention. The world’s largest ETF, issued by Van Eck Global, also has the highest-performing concept.
| |
