Indexing and ETFs

Recent times have seen exchange traded funds (ETFs) become the institutional investment tool of choice, often seen as a simple, low cost and flexible way to access the potential rewards of the market. They bring important advantages, in combining the ready-made diversification of index tracking with the ease and flexibility of trading shares. At the end of November 2007 alone, there were over 1,100 ETFs with assets worth 177.3 billion (USD), listed on 42 exchanges around the world. European ETFs assets made a large proportion of that number, making it the fastest growing continent for ETFs with the average ETF holding in Europe considered to be around $10m, compared with about $100m in the US.

As more companies launch ETFs, the market has become larger and more competitive. However, increased ETF players ensure innovation and healthy competition and also add credibility to the actual investment segment. Indices play a vital role in the creation of these successful ETFs. Generally, ETFs are created to sit on, or track an underlying index, which in many cases is already used as a recognised benchmark in some shape or form, allowing the ETF performance to mirror a broader stock universe. The index is of vital importance, both from the technical aspects of running the funds, as well as helping with market acceptance and understanding of the investment opportunity

As a global index provider, FTSE is no stranger to the ETF world and has had great success in the creation of tradable indices to support ETFs in many markets – Total ETF assets under management based on FTSE indices were in the region of USD 23.72 billion at the end of November 2007, and increasing month on month. Examples of these worldwide include the FTSE Xinhua China 25, the iShares FXI A50 China Tracker listed on Hong Kong, and TSEC TTT, one of the world’s largest ETFs which is listed on the Taiwan Exchange. Across Europe ETFs track our FTSE 100 and 250 indices, as well as the FTSE Real Estate Index.

FTSE is working closely with investment managers to meet a strong market demand for new and innovative indices to support ETFs across the asset classes, as well as for new approaches to equity investment. Specialised ETFs are being introduced on a regular basis, based on narrower and more niche indices. Such innovative ETFs now include an ETF from BBVA, based on the FTSE4Good IBEX Index, the Spanish version of the responsible investment index of choice and also DB x-trackers FTSE 100 Short ETF, a shorting instrument based on the underlying FTSE 100 Index. Emerging markets are also observing the trend and in January 2008 launched FTSE and ATHEX recently licensed Alpha Bank Group to create an ETF based on the FTSE/ATHEX 20 Index. This is the first ETF on ATHEX and boasted an initial net asset value of €140m.

Licenses have been issued to investors to create ETFs on the following indexes:

FTSE 100
FTSE 250
FTSE Xinhua China 25
FTSEurofirst 80
FTSEurofirst 100
TSEC Taiwan 50
FTSE UK Dividend +
FTSE RAFI 1500 Sectors, US 1000, Eurozone
FTSE EPRA NAREIT Europe, Dividend+ US, Dividend+ Asia, Dividend+ Global Indices
FTSE Turkish Lira Government Bond Index
FTSE/ASEAN 40
Macquarie Global Infrastructure 100
FTSE UK Gilts Index Series

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