Variation has always been a crucial facet of investing.
Recognising and understanding that assets react differently in a variety of market conditions is at the heart of a successful investment strategy.
As a global investment manager with professionals located in jurisdictions around the world, we also recognise that attitudes, incentives and ways of doing business differ from place to place.
Identifying these differences, even in outwardly straightforward practices such as buying and selling exchange-traded funds (ETFs), can help us understand clients’ investment decisions and aid us in providing them the most appropriate service.
The Birth and Growth of ETFs
In 1993, the US Securities and Exchange Commission (SEC) approved the first ETF to be listed in the United States. It was a broad-based domestic equity fund tracking the S&P 500 Index,1 and recently celebrated its 25th anniversary.
Europe came later to the ETF party; the first ETF arrived in Europe seven years later, with listings on German Deutsche Boerse and London Stock Exchange.
As things stand today, the United States accounts for the lion’s share of ETF assets, with Europe in second place.
Much of the differences in the way ETF markets have evolved in the two regions relates to who uses these products, how they use them and where they access them.
Different Market Structures
Consequently, the market structure for ETFs in Europe is markedly different from that of the United States. Some investors may not be aware of the choices to buy and sell ETFs that are available to them.
In the United States, most ETF investors trade over one exchange, with one clearing house. Additionally in the US initial interest in ETFs stemmed from retail investors, subsequently spreading to fee-based advisors and institutional investors. All three constituencies are now active participants in the ETF market
For Europe, the development of ETFs followed an entirely opposite trajectory. Institutional investors, such as private banks, wealth managers and asset managers, spearheaded the charge, followed by fee-based advisors and retail investors.
Trading ETFs in Europe is more fragmented because there are multiple exchanges across jurisdictions and multiple clearing houses. But there remain a range of trading styles and options available to ETF clients in Europe.
According to our analysis, in contrast to their US counterparts, many European ETF investors trade “over-the-counter (OTC)”—dealing with a broker, either directly or through a Request for Quote (RFQ) platform.2
NAV Trading vs Intraday
Among the most widely cited selling points for an ETF versus a traditional mutual fund are the transparency, accessibility and flexibility around trading the product. Prices are quoted throughout the day and investors can buy an ETF on-exchange at any time during trading hours. This is known as “at-risk” trading.
This style of investing may prove attractive for investors that follow the markets closely, those that have a shorter time horizon for their investments or those that might want to be more opportunistic based on market events.
But not all ETF investors need that flexibility.
In Europe, for a variety of reasons, investors may prefer simply to buy or sell ETF products at the fund’s net asset value (NAV).3 In most cases, these so-called NAV investors would need an intermediary or to specify a NAV trade via an RFQ platform.
Know the Options
We believe it’s important that investors are aware that there are different ways to access and trade ETFs.
Trading ETFs in Europe
Ultimately, the decision about trading style will depend on a number of factors and we would always recommend speaking to a broker or to the issuer to understand the options available.
Jason Xavier’s comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.
1. Source: Investment Company Institute, “2017 Investment Company Factbook.”
2. A Request for Quote (RFQ) platform is an electronic auction-like system specifically for ETF trading, which allows investors access to real-time auctions and trade large orders.
3. Net Asset Value (NAV) represents an ETF’s per-share value. The NAV per share is determined by dividing the total NAV of the fund by the number of shares outstanding.