The rise and rise of exchange traded funds

Turmoil in global markets is shifting European investors' portfolio holdings, with increased take up of ETFs, providing innovative opportunities for asset managers.

Report Highlights
This brief analyses the rapid growth of ETFs, focusing particularly on their rise in a period where the industry has seen substantial mutual fund outflows. It considers the features of ETFs that have contributed to their rising popularity and suggests that asset managers draw on these features when creating and marketing ETFs.

As well as charting the phenomenal rise of ETFs, Datamonitor sizes the global market and forecasts the future growth of ETFs through to 2012.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
There will be a shift in distribution towards low cost consumer friendly channels 2
Consumers want to access financial products via simple and convenient channels 2
Consumers would prefer to use channels that offer comfort and safety 2
Customers want to use the most convenient channels for their banking 4
Banks are going to cut costs in light of the credit crunch 5
Banks will make products more channel specific 5
Multi-channel offerings were previously assumed to be the best strategy for banks to maximize revenue 5
Global online banking technology will see continued investment despite a projected dip in 2009 6
Therefore, traditional channels are going to remain important for selling complex products 8
Branches will remain popular channels because of the simple and safe service they provide 8
Only one-fifth of consumers use branches exclusively for transactions 8
To improve customer relationships, branches will become more advice-based 9
In line with customer preferences both call centers and direct mail will change in purpose 11
Call centers will become more service and enquiry based but they will still remain useful for cross-selling 11
Direct mail distribution will diminish as this channel will solely be used for marketing and cross-selling 11
Technologically advanced channels are experiencing surging demand 11
Online distribution channels are becoming more personalized 12
Internet banking penetration is becoming widespread in developing countries 12
Online product agreements will grow in popularity 12
Intermediaries will focus on the online channel for the distribution of products 13
Internet-based advisors are experiencing greater traffic as a result of increased financial uncertainty 13
Security will remain a prevailing issue for the online platform 15
Direct virtual banks offer consumers the possibility of fully compatible internet banking 17
Mobile phones offer portable banking services without the requirement to visit a branch 19
Similar to the online platform, mobile phone banking is subject to security concerns 19
The extensive use of mobile phones in developing regions will continue to drive growth 20
Lloyds TSB and Citibank have led the way so far for mobile banking services 20
Consumers will utilize SMS services for balance maintenance rather than product applications 21
If security concerns are overcome, ATMs could become popular channels of distribution 22
TV banking will disappear as a distribution channel but games consoles offer some potential for banking 22
APPENDIX 23
Supplementary data 23
Definitions 24
ATM 24
Intermediary channels 24
Mobile phone banking 24
Non-standard channel 25
Remote channels 25
Smart Phone 25
TV banking 25
Virtual banks 25
Web 2.0 25
Methodology 25
Further reading 25
Ask the analyst 26
Datamonitor consulting 26
Disclaimer 26
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Table 1: iShares offers equity, fixed income and commodity ETFs 15
Table 2: State Street Global Advisors's ETFs focus on US and international sectors/industries 16
Table 3: Vanguard has a range of 38 ETFs on offer, representing $40.23 billion in AUM 19
Table 4: Lyxor manages a broad range of ETFs, with many distinguished geographically 21
Table 5: PowerShares offers a very comprehensive sectoral range of ETFs 23
Table 6: ProShares offers its own 'short' and 'ultra' ETFs designed to meet the needs of different markets 25
Figure 1: ETF growth in the US will reach close to 25% by 2012 when the stock market has recovered 4
Figure 2: Germany's ETF market has exploded in the last five years 5
Figure 3: Euronext's NextTrack ETFs have grown strongly in the past few years 6
Figure 4: ETF trading on the London exchange has grown strongly, particularly in 2008 7
Figure 5: After lackluster growth in 2009, Europe's ETF market will grow strongly again 8
Figure 6: Hong Kong's ETF market boomed in 2007 9
Figure 7: Hong Kong's ETF market will grow by nearly 35% year-on-year by 2012 10
Figure 8: Spelling out ETF basics for investors 13
Figure 9: iShares stresses that its ETF are different 14
Figure 10: SPDR is the propriety name for SSgA's ETFs and the website is full of information about product range and performance 17
Figure 11: Vanguard has an attractive website offering ease of accessibility to its range of ETFs 20
Figure 12: Lyxor provides a list of key benefits of Lyxor ETFs 22
Figure 13: Invesco PowerShares offers 'active' ETFs 24
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