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ETFs: easy, transparent, flexible

ETFs: easy, transparent, flexible

ETF (exchange-traded fund)

Index funds investors can buy and sell like shares via the stock exchange

Deutsche Börse launched ETF trading in Europe on 11 April 2000 with just two products and total assets under management of €400 million. The two exchange-traded index funds issued by Merrill Lynch International enabled investors cost-efficient access to the performance of the EURO STOXX 50 and STOXX Europe 50 indices for the first time.

Liquidity in ETF trading – important aspects investors should consider

  • Liquidity is crucial
  • Xetra liquidity measure XLM
  • Number of designated sponsors
  • ETF size
  • Order book depth
  • Reference market availability
  • Comparability of liquidity indicators
What was then still new terrain in Europe has meanwhile become a standard investment form for private and institutional investors alike. When it comes to taking the first steps in investing, leading consumer portals recommend widely diversified index funds. The reason is clear: E-T-F – these three letters could also stand for easy, transparent and flexible. ‘Easy' because a product can track entire markets, 'transparent' because the underlying index is exposed, and 'flexible' because the products are extremely liquid in terms of exchange trading.

Increasing liquidity in ETF trading has led to significantly lower transaction costs for investors and traders. The graph below shows how implicit transaction costs have fallen by 86% as a result of the increased liquidity in ETF trading in recent years; transaction costs are now below an average of 6 basis points per ETF for the 20 most liquid equity ETFs. Blue-chip ETFs on the DAX or EURO STOXX 50 are the most liquid instrument groups overall in Xetra trading and exceed even the most traded DAX single stocks.

Fig. 1: Average implicit transaction costs for the 20 most liquid equity ETFs on Xetra in basis points (€100,000 round trip)

In terms of costs, ETFs have another major advantage. Management fees are normally considerably below those of actively managed funds, which attempt to outperform a reference index. As a study by rating agency Standard and Poor’s shows, over 60 percent of actively managed funds fail to achieve this objective.

The triumph of ETFs has enabled Deutsche Börse's ETF segment to grow at a startlingly rapid pace. With a product offering of more than 1,250 ETFs from over 20 issuers, Deutsche Börse offers investors the largest selection of ETFs in Europe. The offering is continually expanded with new ETFs that also provide access to markets previously difficult to access or that track innovative Smart Beta index concepts that promise an optimised risk-return profile compared to traditional indices. In 2015 alone, 137 new listings were added, including, for the first time, ETFs providing access to Chinese government bonds and Indian corporate bonds.

Until today, Xetra is still the leading on-exchange market and with it the reference market for ETFs in Europe. Deutsche Börse has set itself the target of continuing to improve efficiency of exchange trading with ETFs.