In partnership with the Association of Luxembourg’s Fund Industry (Alfi), Amcham’s seminar was designed to explain ETFs and raise awareness about them. So what are they? According to Bernard Lhoest, of Ernst & Young, ETFs are investment funds that trade as a single security, “whilst giving an exposure to an underlying index.”

The advantages attributed to these are, amongst other things, that they represent cost-effective investment, instant market access at a very low cost and a way for investors to gain instant diversified exposure to a particular market, region, sector, asset class and investment strategy all through one simple transaction. ETFs are quite new, the first one in Europe having been launched in 2000, while the European ETF industry had a total 812 ETFs with assets under management of 217 billion US dollars in November 2009.

The industry has certainly grown in terms of both size and significance. As Manooj Mistry, Head of ETF structuring at the Deutsche Bank, points out, “ten years ago an active investment manager would not have given an ETF manager the time of day.” Things have certainly changed: ETF may represent only approximately 1.5% of investment fund assets in Europe, and will not replace traditional investment funds, but they are being seen as complimentary tools which investment managers can use to gain exposure to markets that may have previously been considered inaccessible. Mistry continues, “active managers are now seeking out ETF managers. Retail demand will certainly grow in Europe in the coming years.”

Flexible and pragmatic

On the administrative side, ETF managers face several challenges, according to Florence Alexandre, of State Street Bank. “Administrators need to be flexible under time pressure, but accuracy and reliability are also needed, and technological demands need to be taken into account. This is a high volume, low margin business where nothing is ever simple. The demands on people, technology and processes are significant.”

And what about Luxembourg? There are some positive factors which promoters should consider for setting up in this country, according to Michelle Eisenhuth of Arendt & Medernach. The regulator here is flexible and pragmatic, while UCITS IV has had a positive impact for ETFs, even if the fiscal environment as it is could throw up some obstacles.

The recent growth of ETFs highlights investors’ lack of confidence in active investment managers in the face of higher fees and poor returns, while ETFs provide easier access to markets than other vehicles. Are there any causes for concern? Over-crowding in particular market segments could be a problem for ETFs, while from a European perspective the market is very fragmented at a regulatory level.

A more harmonised approach, like that in the United States, would be considered beneficial, according to the experts.