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ETPS HAVE BEEN BOOSTED BY CRISIS

NIZAM HAMID<br /><strong>HEAD OF SALES STRATEGY, ISHARES EUROPE</strong><br /><br />WHILE trading volumes on equities have fallen by 46 per cent during the financial crisis, volumes in exchange-traded products (ETPs) have been comparatively healthy. Over the past year trading volumes in ETPs rose to &euro;54bn from &euro;37bn and as a proportion of trading, they have risen from about 3.5 per cent to approximately 12 per cent. <br /><br />Why has this happened? Partly, because ETPs offer tight spreads. For example, an iShares exchange-traded fund (ETF) with the FTSE 100 as the underlying asset has a spread of four basis points compared to eight basis points for the actual index. Similarly for an iShares ETF based on the DAX spreads are just over 4.5bps and below the spread of the underlying equities which are closer to 8bps.<br /><br />Secondly, ETFs&rsquo; inherent diversification allows investors to spread their risk. The depth of liquidity that ETFs offer (thanks to increased trading volumes) also means that trading ETFs on exchange is easier and you are more likely to get the best price. <br /><br />Turnover in regional products such as the French CAC 40 or the German DAX 30 &ndash; have seen turnover rise from &euro;8.7bn in July last year to &euro;12.95bn &ndash; 48 per cent change.<br /><br />The growing depth of liquidity is supporting the on-exchange liquidity and attracting more traders to the market. Enhancing the liquidity and the trading volumes has been the growing interest in ETPs from the broking community. These market participants have recognised the use and growing appeal of ETPs and the more brokers that get involved, the more this adds to general usage of the product. <br /><br />ETPs came to the fore in the financial crisis as a means of managing your risk and getting the best spreads, but the trading volumes now suggest that the number of investors has reached a critical mass that should see these products continue to be attractive in their own right when the financial crisis is over and markets are back on track.<br />