Merrill Lynch Says ETFs Are The Hot Investment Sector

by Carla Johnson, Investors Offshore, London

02 August 2002

According to a report released yesterday by Merrill Lynch, retail and institutional investors alike are gravitating to exchange-traded funds, not least because of the opportunities they offer for effective shorting of an index or sector.

Merrill lists 246 ETFs worldwide with nearly $130bn under management, up from less than $50bn at the start of 2000.

"This is the only section of the equity market that has shown growth over the past year with the background of declining equity markets," said Michael Maras, head of global equity-linked research at Merrill. "The growth you see is not inflated by rising index levels. It is genuine client interest."

Nearly 40 per cent of ETFs are listed in the US and they account for about 70 per cent of assets under management. The most popular products have been the S&P 500 Spyder (SPY) and the Nasdaq 100 Index Tracking Stock (QQQ). But sector- and style-specific ETFs, as well as those tracking international indices, are gaining favour. For example, the iShares MSCI EAFE, a world equity index, took in $3.8bn last year.

"You're going to see ETFs being the building block of structured products or funds of funds going forward," Mr Maras said. "It's simple and it doesn't need any extra work. It's traded and settled like a share . . and the ability to short the product is very, very attractive."

Among the European exchanges to offer ETFs is Virt-x plc, which unveiled a new market segment for them in May. The market initially supports trading in 23 ETFs, including iShares funds.

Commenting on the launch of this new market segment, Antoinette Hunziker-Ebneter, CEO of virt-x plc, said:

"The introduction of ETFs on virt-x will give our members access to this exciting new equity class. It also strengthens our position as the only truly pan-European stock exchange and offers virt-x an additional revenue stream. Developing a market for ETF products in conjunction with SWX not only gives the market place immediate critical mass, it also gives the issuers of these products access to a pan-European pool of liquidity.

In Hong Kong, ETF activity started in March 2001 when Hong Kong Exchanges and Clearing (HKEx) developed a new market structure for them. The first two funds to be traded were the iShares MSCI Taiwan Index Fund and the iShares MSCI South Korea Index Fund, both based on MSCI indices that represent investment opportunities in Taiwanese and Korean companies available to investors worldwide.

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