Outlook – Europe: Taking Aim at 2011


In 2010, ETF investors concentrated their new investments in several asset classes, most notably emerging market equity, commodities, US, German and Japanese equity, as well as Euro government bonds. ETFs that provide investors with exposure to changes in the VIX – a popular proxy for US equity market risk – also attracted significant assets. Outflows were concentrated in euro zone ETFs reflecting investor unease about the sovereign debt crisis; euro zone equity ETFs experienced outflows of €1.1 billion, while euro-denominated money market ETFs experienced outflows of more than €1.5 billion…..

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2010 Investment Results

The past year was one in which risk was generally rewarded. While in Europe there was unease seemingly at every turn, most broad asset classes generated handsome double-digit returns. Small cap stocks across the globe once again handily outpaced large cap stocks, while emerging market stocks generally outperformed their developed markets counterparts. Of the main regions, only the euro zone failed to deliver double-digit gains as concerns about sovereign debt and weak economic growth led investors to abandon the area in favour of other developed markets or the faster growing emerging markets. Bonds also fared well, especially given the prevailing low interest rate environment. Emerging market debt  local currency), which gained 33.1%, and global high yield bonds, which returned 22.8%, led the way. The BarCap Global Aggregate Index, which includes a broad range of government-related, corporate and securitised investment grade debt, returned 12.9% on the year, more than the 11.1% return of European equities.
Commodities enjoyed strong demand and excellent performance in 2010. The broad-based Dow Jones-UBS Commodities Index returned 24.9% and gold did significantly better, with a return of 38.2%, as investors around the world reacted to ‘Quantitative Easing’ by US and UK Central Banks and signs of rising inflation levels.

What did this mean for investors?

15032011 1In general, for investors who were not all in cash, portfolio returns were strong in 2010. A blend of 60% global equities (including emerging markets) and 40% global bonds would have yielded a return of approximately 17.5%. The weak euro contributed to the strong returns and further emphasises the importance of investing at least a portion of assets outside one’s home country or region. A more diversified investor with exposure to small cap stocks, real estate, high yield bonds and commodities would have seen an even higher return.
ETF Growth in 2010 Dri ven by Strong Investor Flows
In 2010, ETF assets in Europe increased by €56 billion to more than €227 billion – a gain of more than 30%. This growth was driven by much more than market appreciation. ETFs domiciled in Europe had positive net cash flows of more than €28 billion; the popularity of ETFs was also evident in the US, where ETF assets topped $1 trillion for the first time, and calendar year inflows exceeded $100 billion.
Equity-based ETFs continue to dominate in terms of total assets in Europe, accounting for seven of the top ten categories and approximately 70% of total assets. Bond and commodity ETFs represent the majority of the remaining assets, although alternative ETFs, that give investors exposure to more esoteric asset classes such as hedge funds or currencies, continue to gain in popularity.

15032011 2The growing acceptance of ETFs as an efficient method of investing was particularly clear in the emerging markets arena, where three of the top ten selling funds were ETFs. This is especially interesting in an area of the market that has
traditionally been viewed as a fertile hunting ground for active management. Clearly investors are increasingly swayed by the benefits of ETFs, such as cost efficiency, full transparency and total market exposure. It is also interesting to note that in the Europe large cap blend category, ETFs experienced inflows of more than €800 million in 2010, whereas outflows from mutual funds in the same category exceeded €3.4 billion.
15032011 2aThe ETFs with the highest flows closely tracked the most favored categories. Emerging market equity flows were dominated by the iShares MSCI Emerging Markets ETF and the db x-trackers MSCI Emerging Market TRN ETF, which saw combined inflows of almost €3.3 billion. The iPath S&P 500 VIX Short-Term Futures ETN, designed to provide exposure to US equity market volatility, through CBOE Volatility Index futures, also proved popular, gathering  more than €1.6 billion in assets. Investors also gained exposure to the strong, export-led recovery in Germany, through the iShares DAX and db x-trackers ETFs. Investors seem to have a slight preference for physicallybased ETFs, evidenced by the fact that the iShares Emerging Market Equity and German DAX ETFs outsold the syntheticallymanaged db x-trackers offerings.

European Sector Performance and Sector ETF Flows
Sector ETFs allow immediate access to a specific market segment enabling investors to express their view on a particular sector and gain exposure to a potential theme or emerging trend in the market. As an example, a European equity portfolio manager wishing to quickly gain exposure to the emerging market growth story could invest in an Industrials ETF, such as the SPDR® MSCI Europe Industrials ETF (STQ). In a single trade, this ETF would provide the investor with a portfolio of European companies which, on average generate approximately 40% of their revenues from emerging market countries. Or, an investor focused on generating a high level of income could invest in a Telecoms ETF, such as the SPDR® MSCI Europe Telecommunications Services ETF (STT), which currently yields almost 6%.3 Sectors can also be used to control risk, by allowing investors to quickly and efficiently adjust their sector weights at the portfolio level, and are also commonly used to take advantage of short-term trading opportunities. As sector ETFs are a widely used tool for reflecting investment views, a study of sector performance and flows into sector ETFs can be a good indicator of current market sentiment.

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As the table above indicates, the cyclical sectors generally outperformed the more defensive sectors in 2010. European financials struggled against the back drop of the euro zone sovereign debt crisis and uncertainty about the regulatory environment.

15032011 1During January 2011, we witnessed a sharp rotation with Financials, Technology, and Telecoms leading the market higher. Financial ETFs in particular have been a beneficiary year-to-date, capturing about half of the €1 billion net inflows into European Sector ETFs in 2011.4

A question frequently asked by industry observers is whether ETF investors’ decisions are driven by cost, brand awareness, or other factors. With more than 1000 ETFs in the marketplace, there are often multiple ETFs designed to track the same index or asset class. Based on our analysis of the market, it does not appear that cost alone is always the deciding factor. Other key considerations include:

1. Index methodology:
Is there a significant difference in index methodology among the ETFs tracking the same asset class – specifically one that impacts performance? In Europe for example, does the ETF track a broad market index, such as the MSCI Europe, or a narrower, but likely more liquid large lap index such as the STOXX Europe 50? The return differential between seemingly comparable indices can be significant. In 2010, the MSCI Europe Index outperformed the STOXX Europe 50 Index by almost 800 basis points.

2. Replication method:
How is the ETF managed? Is it physically backed through full replication or optimisation? Or does the ETF manager utilise a swap-based replication approach, where they enter into total return swaps with one or more investment banks, thereby potentially introducing credit risk into the mix?

3. Tracking Error:
Does one ETF track the chosen index more closely than others? Does one have a manager with a proven track record in index management?

4. Liquidity:
Is one ETF more liquid than the alternatives? How do they compare in terms of assets under management and dollar value traded?

5. Total Costs:
How do the products compare in terms of total costs, which include bid/ask spreads, trading commissions, and expense ratio? Does one ETF have a pronounced advantage in terms of total costs?

The following example helps to illustrate this decision process.
MSCI Europe ETFs
There are more than a dozen ETFs that track the MSCI Europe Index and trade in Europe, all of which share the same key investment goal – track the index as closely as possible. How does an investor make the decision as to which ETF to hold? Of the top four MSCI Europe ETFs by assets under management, all have subtle differences in replication method, fees and expenses.

15032011 5Potential MSCI Europe ETF investors would likely have to answer the following questions before making an investment:
1. What method of replication am I most comfortable with?
2. How much of the market would I like to cover?
3. To what extent are total costs important?
4. To what extent am I willing to accept tracking error?

The Flash Crash of the US Stock Market
On 6 May 2010, US equity markets experienced a sudden intraday drop of nearly 10% between 2:30 and 3:00 pm. Certain stocks declined significantly more, and most of these securities recovered just as sharply. Ultimately, FINRA  and the exchanges cancelled any trades executed at more than 60% away from their prior value. According to the SEC, which placed the cause of the Flash Crash on a massive trade in E-mini S&P 500 contracts, there were more than 20,000 cancelled trades across more than 300 securities, and almost two-thirds of these securities were ETFs.
Many questioned why ETFs were such a high proportion of the broken trades. Historically, ETFs trading volumes spike in periods of high volatility; ETF volumes jumped to 40% of total dollar volume on 6 May 2010. In the 45 days prior to 6 May, the SPDR S&P 500 ETF (SPY) typically traded seven million shares during that 20-minute window. On 6 May, between 2:40 and 3:00 pm, SPY traded 81 million shares – more than 11 times its normal volume. It appears that more ETF trades were broken because ETFs were traded at a much higher level during this period of time. In 2010, a handful of articles also emerged that challenged the solidity of the ETF structure. Some of these articles tried to blame ETFs for a variety of ills, such as the low number of initial public offerings in small cap stocks. Others questioned whether ETFs could collapse if they saw an overwhelming amount of redemption activity. Additional concerns were raised about the credit risk that is introduced by the synthetic, swap-based ETFs that are prevalent in Europe. Many of these articles demonstrated a serious misunderstanding of the capital markets and ETF structure. However, they also provided an opportunity for ETF providers to educate investors on how ETFs are constructed and the safeguards that are in place to protect shareholders.

Looking Toward 2011…
The Active-Passive Debate

Predominantly, ETFs are passive investment vehicles. They are managed to track indices and seek to provide performance that is similar to the underlying index. An ongoing debate in the investment world has been whether it makes more sense to invest actively and seek to outperform the index or to invest passively and seek to match the index return. Looking at the combined assets in mutual funds and ETFs, the vast majority is still in actively managed funds. As a result, the share of index funds has increased in recent years, with much of the growth coming from increased demand for ETFs.
From a performance standpoint, the benefits of active equity investing have been mixed. Over the long-term, the majority of actively-managed equity mutual funds have been unable to outperform the indices, net of fees. However, in shorter time periods, active management can add value in terms of protecting on the downside or outperforming on the upside.
Unquestionably, there are also some fund managers who have demonstrated the ability to consistently add value over  time, but they are in the minority and it can be very difficult to identify these managers in advance. As an example, we highlight the rankings of the SPDR MSCI Europe ETF (ERO) in the Europe Large-Cap Blend Equity manager universe over time:
A relatively new development in the ETF world has been the introduction of actively-managed ETFs. For the most part,
these products have been introduced by smaller ETF issuers or managers with little brand recognition as active managers.
However, as more established active managers file for exemptive relief to issue actively-managed ETFs, we expect the actively managed ETF space will be an area of increased focus and innovation in 2011. In Europe for example, Man Group has recently announced that it will be launching an actively-managed Europe equity ETF in conjunction with the ETF provider, Source. The ETF is designed to capture trading ideas from some of Europe’s leading brokerage houses.

Shifting assets from the home country
Around the world, most investors exhibit a significant home country bias to their portfolios. According to the 2010 World Wealth Report, high net worth investors in North America, Europe and Asia Pacific held between 59% and 76% of their portfolios in their local regions. North American investors demonstrated the most home bias, holding only 24% of assets outside North America. European investors in contrast held 41% of their assets outside their home region, up from 35% in 2008. We expect this trend towards more global portfolios to continue, with an increasing proportion of assets being invested in emerging market equity and bonds.

Generating Income in Portfolios
With government bond interest rates near historic lows and cash rates at virtually zero, investors have been starved for
income in portfolios. Another multiyear trend expected to continue in 2011 is increased investments in ETFs that focus
on high dividend paying stocks. Investors have become more interested in ‘getting paid while they wait’ than counting on capital appreciation. Dividend-oriented ETFs offer the potential for capturing much of the upside of traditional equities as well as higher yields. From 1926 to July 2010, dividends have represented 34.5% of the total return of the S&P 500. In some periods, it has been even higher – in the 1940s and 1970s, dividends represented 50% or more of the total return for the S&P 500 Index, compared with only 14% in the 1990s. The top five dividend ETFs in Europe are:
Sector ETFs can also be used as part of a high income investment strategy. The SPDR MSCI Europe Sector ETFs that currently yield more than 5% are:
• SPDR MSCI Europe Telecom Services ETF (5.8%)
• SPDR MSCI Europe Utilities ETF (5.7%)
• SPDR MSCI Europe Energy ETF (5.6%)

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In Conclusion
All things considered, 2010 will be remembered by investors as a very successful year, albeit one marked with uncertainty and volatility. A wide variety of asset classes provided positive total returns, many in the double-digit range. In general, risk was rewarded – with smaller cap stocks outperforming larger cap names, and riskier junk bonds outperforming the broad bond market. Commodities rallied as investors bet on continued improvement in the global economy and looked to guard against rising levels of inflation, driven by strong growth in emerging markets and expansionary monetary polices in the west. For equities, most regions turned in solid performance, with only the euro  zone failing to deliver double-digit returns.
ETFs benefited from this solid market performance. ETF assets in Europe climbed more than 30% over the course of the year.
During 2010, ETF inflows were strong, totaling more than €28 billion. Looking ahead, areas of future growth will be in ETFs that track the new equity indices and fixed income markets. Actively-managed ETFs could begin to gain traction after stuttering growth to date. Investors will continue to seek incomeoriented investments, whether it is with dividend-oriented ETFs or sector ETFs with higher yields. The search for diversification will continue as well, as investors try to add investments with low or negative correlations to stock and bonds – typically commodities, natural resources stocks, inflation linked bonds, and REITs.


Past performance is no guarantee of future results. It is not possible to invest directly in an index. Index data is not meant to represent that of any particular fund. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs. Diversification does not ensure a profit or guarantee against loss.
In general, State Street ETFs can be expected to move up or down in value with the value of the applicable index. Although State Street ETFs may be bought and sold on the exchange through any brokerage account, State Street ETFs are not individually redeemable from the Fund. Investors may acquire State Streeet ETFs and tender them for redemption through the Fund in Creation Unit Aggregations only. Ordinary brokerage commissions apply. Shares of the State Street ETFs are not insured by the FDIC or by another government agency; they are not obligations of the FDIC nor are they deposits or obligations of, or guaranteed by, State Street Bank and Trust Company. State Street ETFs are subject to investment risks, including possible loss of the principal invested. Correlation is defined as a statistical measure of how two securities move in relation to each other. “SPDR®” is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”) and has been licensed for use by State Street Corporation. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its Affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products. Further limitations and important information that could affect investors’ rights are described in the prospectus for the applicable product.
Distributor: State Street Global Markets, LLC, member FINRA, SIPC, a wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs.

Source: ETFWorld – SPDR

ETF Obbligazionario Corporate – IBOXX EUR CORPORATE
COMMENTO: perdita di spinta rialzista per il titolo, con le quotazioni che dai minimi di marzo-aprile (109,40) si portano al test di 120,00/50, per poi stazionare nelle ultime settimane fra quest’ultimo livello e 118,00. Per le prossime settimane un nuovo superamento di 120,50 consentirebbe un ulteriore salita con prossimi obiettivi 122,00 e 123,00. Indebolimento nelle prossime settimane in caso di ritorni sotto 118,00 con probabile discesa verso 116,50, quindi 115,00.
Dividendi: stacco il 26 agosto’09 di 1,2941 euro, pagamento il 23 settembre.

ETF Obbligazionario – EuroMts Inflation Linked (Lyxor)
COMMENTO: l’Etf dei titoli di stato europei legato all’inflazione ad aprile riesce a superare la forte resistenza statica a 109,50-110,00, avviando un consistente movimento rialzista verso 120,00 (max. 117.87), per poi rettificare nelle ultime sedute. Per le prossime settimane sono possibili movimenti di riaccumulazione fra 115,00/20 e 117,00/50, prima di tentare nuovi spunti rialzisti verso 120,00. Il quadro tecnico per i prossimi mesi si indebolirebbe sotto 115,00/20, determinando la continuazione della discesa verso 111,50-112,50, dove sono attesi nuovi acquisti.

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