20 years of ETFs

The idea was as simple as it was revolutionary - and it is still convincing today. In January 1993, the first ETF was launched in New York. Today there are almost 7,000 ETFs worldwide with assets of more than 6 trillion dollars. It took a few years for ETFs to find their way from New York to Europe, but since then things have been moving up almost unchecked in this country as well.

On 11 April 2000, Deutsche Börse's ETF segment was launched under the name XTF. Xetra was thus the first trading place for ETFs in Europe - and has been the market leader ever since. It started with two ETFs referring to EURO STOXX 50 and STOXX Europe 50, issued by Merrill Lynch International with its LDRS product family, which is now part of BlackRock's iShares family. This was followed in 2001 by the first DAX-ETF, launched by Hypovereinsbank subsidiary Indexchange, which is now also part of iShares/Blackrock.

Since then, trading and product innovation have picked up speed. In 2019 alone, 183 new ETFs were issued. Today more than 1,500 ETFs are listed on Xetra. They have an average monthly trading volume of €11 billion, making Deutsche Börse the leading exchange in Europe with a market share of 28 percent. At the end of the first trading year, in December 2000, ETF fund assets in the XTF segment amounted to 400 million euros. By the end of December 2019, ETF assets had multiplied to a record €710 billion. Xetra is thus fully in line with the trend: more than 100 billion euros of fresh money flowed into European ETFs in 2019. This was the highest annual growth rate since the start of business in 2000, and European ETFs now account for a total of around one trillion euros.

Strong trend. For investors, the dynamic development means not only an ever-increasing ETF offering, but also falling costs and ever-increasing liquidity. This is also very clearly reflected in the sharp fall in bid-ask spreads and the liquidity measure XLM calculated by the stock exchange. It describes the average spread for a Xetra round trip order of EUR 100,000. For the 20 most liquid equity ETFs, the XLM today averages only 4.2 basis points -- half the value ten years ago.

The Xetra liquidity measure (average spread for a round trip order of €100k) of the 20 most liquid equity ETFs on Xetra averaged 4.2 basis points in 2019.

Tough competition. This steadily increasing improvement in trading conditions seems astonishing at first glance, because despite the enormous growth, the ETF market remains highly concentrated on the provider side. Although new ETF providers have been pushing into the market again and again for years, very few providers have dominated the business almost since the start of trading, not only in Germany. In Europe, the three market leaders Blackrock (iShares), DWS (xtrackers) and the French Lyxor manage around 63 percent of ETF assets. The rest is shared by many, mostly much smaller players: no one from the second league has a market share of more than 6 percent. Blackrock, on the other hand, controls 44 percent of the total ETF assets. The market leaders also get the most out of newly invested money. Roughly speaking, their share of the inflows roughly corresponds to their share of ETF assets.

Despite this oligopoly, the costs of ETFs are falling. According to a study by the Investment Company Institute, the average cost of equity ETFs fell by 22 basis points between 2013 and 2018 alone. According to Morningstar, equity ETFs in Europe today cost an average of 0.37 percent per year. In terms of capital weighting, the average cost of equity ETFs at 0.25 percent is even significantly lower than the simple average. Bond ETFs average 22 basis points.

Pleasant: ETFs on the most important indices are still much cheaper, because all major providers have been tightening the price screws for years, especially the direct pursuers of the market leader Blackrock. As early as 2018, Lyxor was already pushing forward with two equity ETFs at a price of just four basis points. The French Amundi even launched a major offensive in 2019 and now offers 20 equity and bond ETFs, each of which costs only five basis points. Invesco, HSBC and Legal & General also have ETFs in this price class in their product range. 

The price cuts are obviously not missing their effect, especially for large investors. "Institutional investors are increasingly trying to circumvent futures and are turning to ETFs more frequently to do so," reports Dirk Söhnholz, Honorary Professor for Asset Management at the University of Leipzig. Around half of institutional investors want to switch from futures to ETFs, according to a survey by Greenwich Associates. No wonder: ETFs for the major indices today often only have an annual cost of five basis points - and are thus becoming real competitors for futures: "The price advantage that futures and derivatives used to have is hardly existent today," Söhnholz knows. According to calculations by ETF provider Invesco, an investment in the S&P-500 has been almost consistently cheaper with ETFs than with futures over the past five years. Invesco also calculated cost advantages for other important indices.

Advantage for investors: On the supplier side, however, fierce competition has already claimed its first victims in recent years. "Consolidation is in full swing," explains Ali Masarwah, head of editorial research at Morningstar. The balance of the past three years: ComStage is now part of Lyxor, Source was acquired by Invesco, ETF Securities sold its European business to WisdomTree, Van Eck bought the Dutch provider Think ETF. "Nevertheless, it is premature to deduce the imminent end of competition in the ETF market from this consolidation, which mainly affects medium-sized houses," Masarwah believes. After all, new players are constantly entering the ETF business, not only small houses such as Expat, HanETF or Tabula, but also financially strong players such as Fidelity, Franklin Templeton J.P. Morgan or Goldman Sachs at the end of 2019.

"So far, the strong concentration on the ETF market has not led to negative effects for investors. On the contrary," the industry expert judges. One reason: In order to get a foot in the door, new providers usually try their luck with innovative new ETFs, such as Factor or Smart Beta ETFs. Newcomers have no chance with ETFs on the major indices: with these ETFs, the combination of fund size, high liquidity and very low management fees represents an almost insurmountable hurdle for new ETF providers. In peripheral areas, on the other hand, there is still uncharted territory, not only in smart beta approaches but also in the area of Theme ETFs.
 

Development of tradable products on Xetra since the year 2000

In the meantime, Theme ETFs are also sprouting up more and more frequently: Approximately every fifth new ETF listed on Xetra is dedicated to a specific investment theme. Of the more than 1,000 equity ETFs listed on Xetra, almost one in four funds is a Theme ETF. So far, the assets of most Theme ETFs have often remained low, but time and again the providers have hit the right nail on the head. For example, the Amundi Artificial Intelligence ETF, which was launched at the end of 2018, already contains around 180 million shares. The Invesco Blockchain ETF, which was launched a year ago, has grown to more than 40 million euros to date; the VanEck Video Gaming and eSports ETF, which was only listed in mid-2019, has already collected 60 million euros. If the theme is correct, even relatively high costs do not seem to be a problem for investors. The three ETFs mentioned as examples have cost ratios of between 0.35 percent and 0.65 percent, i.e. they cost around ten times as much as the large standard ETFs.

But it is not only Theme ETFs that are taking up more and more space on the exchange's list. ETFs that reflect sustainable investment strategies can also grow rapidly. 62 new ESG ETFs were listed in 2019, giving investors in Xetra trading a choice of 147 ESG ETFs at the end of the year. The assets invested in ESG ETFs on the Xetra trading platform rose to 23 billion euros. Last year, ESG products were by far the fastest-growing category in Deutsche Börse's ETF segment," said Stephan Kraus, who is responsible for the ETF segment.

The bottom line is that the past 20 years show two things. Firstly, innovative ETFs have the potential to become bestsellers, but most investors prefer products that are easy to understand. Second, although a few providers dominate, the ETF market remains in motion. For the time being, ETF investors can therefore look forward to a growing supply, falling prices and increasingly liquid markets.

by Uli Kühn, © March 2020, ETF Magazine

The article first appeared in the March 2020 issue of the ETF magazine "20 Jahre ETF in Europa".