Get Started Investing in ETFs - dummies

By David Stevenson

If you’re wondering who’s using these new-fangled ETFs (exchange-traded funds) in the UK, the answer is everyone! The ETF revolution is truly global – new providers are springing up in almost every part of the developed world and ETFs are even threatening to invade the developing world with launches in places as varied as Botswana and Taiwan.

Gauging just how successful this index-tracking revolution has become is fairly straightforward, because many of the leading ETF issuers such as iShares and Deutsche Bank (through its DB X trackers unit) closely monitor the market, attempting to spot key trends and generally keeping a watchful eye on liquidity on exchange.

The numbers prove that ETFs are mainstream and global. Yet most investors are probably more interested in understanding which asset classes and markets are capturing these huge new investment inflows into ETFs.

This table from BlackRock (parent of iShares) provides an idea of the key markets favoured by investors using ETFs. Unsurprisingly shares of all shapes and sizes dominate the market, although inflows into bonds as well as commodity funds have increased markedly over the last few years.

Markets ETFs Invest In (end of November 2011 or Most Recent Period
Exposure as at November 2011 in US$ Billion AUM (Assets under Management Market Share (%) Year-to-date Change in AUM (%)
Shares 1067 69 0.4
North America 556 36 4.6
Emerging Markets 204 13 –14.3
Europe 114 7 –5.8
Asia Pacific 79 5 –3.8
Global excluding US 66 4 3.2
Global equity 48 3 89
Fixed Income 251 16 21.1
Commodities 196 13 5.7
Alternative 4 0 –1.2
Currency 8 1 27.8

At the end of June 2011, analysts at Deutsche estimated that the global index-tracking industry had reached assets under management of US$1.4 trillion globally, with 22 per cent (€216.4 billion) concentrated in European-listed funds. Over the most recent ten-year period, the European ETF industry grew (in measuring assets) 13-fold (13.2x), the US ETF market grew over 6-fold (6.5x) and the Asian ETF market grew over 2-fold (2.6x).

These numbers represent extraordinary growth because ETFs were virtually nonexistent in Europe at the beginning of the twenty-first century and even in the US they were a tiny niche. Now ETFs are arguably the fastest growing part of the whole global asset-management business.

At the end of December 2011, the Deutsche analysts reckoned that over 3,210 exchange-traded products (funds and notes) of some sort existed globally.