Felix Goltz, a co-author of the European ETF Survey 2006, conducted by asset management research company Edhec, says ETFs have a number of features that distinguish them from other index instruments. "Investors can short ETFs, which cannot be done with index funds. This is often cited as an advantage and our survey found that 60% of respondents do short selling with ETFs."

Compared to futures, swaps and traditional investment funds, ETFs have the strongest growth potential, says Goltz.

"The trend seems to be that investors are using ETFs more and swaps less. There are advantages and disadvantages for both instruments, but one of the main advantages of ETFs is that investors can buy virtually any index, while futures instruments offer a more constrained choice."

The Edhec European ETF Survey 2006 was conducted among 1000 European asset managers and institutional investors during the summer of 2006.

Greg Ehret, senior managing director, State Street Global Advisors and head of European sales and distribution, says ETFs are unique in that they serve so many different constituents; the trading community (including hedge funds) use them to hedge exposures, the long-only world use ETFs for cash equitisation and individual investors and pension funds use them as asset allocation tools.

"ETFs suit many different people and a significant advantage is that they don't require all of the paperwork that is typically needed for derivatives contracts such as swaps."

Equitising cash flows can be done with ETFs in small increments because they typically have no minimum investment and the price of a single share is less than $200.

Says Morgan Stanley: "ETFs can be a good alternative to using futures to manage cash flows: they can be bought in smaller sizes than futures; they do not require any special documentation or accounts; and investors do not have to worry about roll costs and margin requirements."

In addition, the current array of ETFs covers many benchmarks for which there is no futures contract."

In asset allocation, ETFs can be used to target sectors where there are no futures contracts, adds Morgan Stanley. "For settlement and administrative purposes, ETFs are a more efficient way of investing than purchasing a basket of individual stocks to track a given benchmark. They can also be a core holding in a multi-asset portfolio, providing a level of diversification that would otherwise be time consuming and expensive to attain by purchasing the underlying shares."

Edhec's Goltz believes further growth in ETFs could come from fixed income and alternative investments such as commodities.

"In these areas, ETFs are less well used at present. Most of the issuers are beginning to offer ETFs in new asset classes. In our survey, 50% of respondents said they'd like to see more emerging market ETFs and 40% wanted more alternative asset class and commodity ETFs. Only 9% wanted more bond or ethical ETFs, which could be a reflection of the fact that such ETFs are difficult to create."

Figures from ETF Securities suggest commodities (see p76) is a significant growth area. It has launched exchange traded commodities (ETCs) on the London Stock Exchange, Deutsche Borse, Euronext Amsterdam and Euronext Paris and most recently, Borsa Italiana. Assets under management in its 31


ETCs have grown by about 200% since September 2006 to total more than $50m.

The ETCs comprise 21 individual securities and 10 index securities. Investors gain access to all of the key commodity groups; energy, agriculture, livestock, precious metals, industrial metals, without having to engage in the trading or management of future contracts.

Nik Bienkowski, head of listings at ETF Securities, says since launching ETCs more than four years ago, the company has seen huge demand for the new products.

"ETCs have lowered many of the barriers that previously prevented many investors from investing in the commodities market, including access, trading and operational risks, custody and transaction costs. Globally, more than $100bn has been invested in commodity indices and over $20bn in ETCs."

Deutsche Börse recently expanded its XTF segment for ETFs on its pan-European Xetra trading platform, with ten new funds from iShares listed by Barclays Global Investors (BGI). Three of the ETFs use real estate indices as underlyings another five of the ETFs allow investors to track the performance of bonds with varying terms and currencies.

The remainder focus on tracking the performance of the equity market on an emerging market with the iShares MSCI Turkey, and the performance of 100 companies from the infrastructure sector with the iShares FTSE/Macquarie Global Infrastructure 100.

In 2006 turnover in the XTF segment was up 45% year on year to €66.bn. Assets under management rose by 77% to reach a record high of €47bn. A total of 194 index funds are listed in the XTF segment. Average monthly trading volume on XTF is more than €5bn.