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The Sector Boom And Trading Transparency
By Paul Amery | 02 October, 2009   

Barclays Global Investors (BGI) has published weekly reports on the equity ETFs that track the DJ Stoxx 600 supersector indices since late August; here are the net inflow figures over the last six weeks:

Week Ending

Net Inflows (US$m)

21 August 2009

160

28 August 2009

99

4 September 2009

10

11 September 2009

97

18 September 2009

271

25 September 2009

464

Total

1,101

Year-to-date net inflows to these sector ETFs total US$1,784 million, so getting on for two-thirds of this amount has arrived in the last six weeks. This growth rate will be exciting the issuers involved in this area of the ETF market, namely iShares, Lyxor, db x-trackers, Comstage, ETF Securities and Source. Incidentally, BGI’s report suggests that three firms – Lyxor, db x-trackers and Source – have been picking up the lion’s share of new business.

One measurement that is harder to track is the amount of trading that is going on in these funds and whether they really are becoming serious competitors to other, liquid trading and hedging vehicles like futures.

BGI’s report shows that average daily trading volume per sector (i.e. including all ETFs tracking a given index) was a relatively meagre US$3.5 million last week (ending 25 September). BGI aggregates all trading volumes from across the relevant exchange listings for each ETF. In total, 3.7% of the DJ Stoxx 600 sector ETF assets are being turned over daily, on average.

However, Source reported earlier this week that its sector ETFs, which track an optimised version of the Stoxx indices, have seen daily turnover topping 20% of outstanding assets, a much higher figure.

This difference between the exchanges’ reported trading figures and the “real” trading volumes, which only the market makers can see, reveals one of the complexities of the European ETF market. The European MIFID directive does not require the large proportion of ETF trading that takes place on a bilateral basis (or “over the counter”) to be reported on exchanges, and most market participants estimate that only a third of the actual turnover is visible via public channels. However, the difference between Source’s reported amount traded and its funds’ on-exchange volumes is even larger.

I hear that a number of firms are working behind the scenes to bring greater transparency to the European ETF secondary market. There’s clearly a big prize at stake here: publicly verifiable data showing large turnover and narrow dealing spreads will greatly increase public confidence in the market. Then the flows of money − not just into sector funds but the ETF market in general − could become a flood.

 

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