From our European Bureau: A Discussion With Rainer Riess of Deutsche Borse AG


Exchange-traded funds have experienced exponential growth among both retail and institutional investors in Europe, and we expect this to continue. They are a cost-effective addition to mututal funds, and we expect them to grow in significance. -Rainer Riess Rainer Riess, head of Primary Markets at the German Stock Exchange, Deutsche Börse AG, recently answered questions posed by Jim Wiandt, publisher. Reiss discusses the rapid growth of the ETF market in Europe, as well as further expected developments and the general outlook for European markets. The interview was originally posted on the German-language version of

Q: How does the market for the active and passive exchange-traded funds (known in Europe as trackers) look presently…is it more institutional or retail, and how do you see this changing in the future?

A: The market for exchange-traded funds in Germany has developed exponentially since the introduction of Deutsche Börse's XTF segment in April 2000. Average monthly turnover is two billion euro. We are the market leader with 16 index funds and 11 actively-managed funds and a European market share of approximately 60%. XTF is a market for both retail and institutional investors, although actively managed funds are presently a more retail product, and index funds are of more interest to institutional investors. However, we are also seeing an increase in the number of retail investors in index funds.

Q: Do you see ETFs as a significant threat to the index certificate market?

A: It is still the early days for ETFs in Europe, however, initial growth has been enormous. General investment strategies seem to be heading toward index investment - and we expect both index funds and actively-managed exchange traded funds to profit from this trend. Deutsche Börse ETFs also offer investors a higher level of transparency than index certificates. However, at the end of the day the investor will decide what investment strategy works best for him.

Q: In what other ways do you see the European market being significantly different for the ETF market?

A: The European market is not one uniform market like the U.S. It consists of 16 different countries and 16 different markets. Add to that different national legal frameworks, trading systems, and expensive clearing and settlement and it's no wonder you have difficulties with efficient cross-border trading. Consolidation in Europe is needed, but it will take time. Another significant difference is that European trading takes place on state of the art electronic trading systems such as Xetra.

Q: What's on the horizon for future oroduct development?

A: We can expect further innovation in the transparency of actively-managed funds in Europe in fall 2001, as well as in the development of further index funds. There is room for further growth in the European ETF landscape, and Deutsche Börse certainly offers the most diverse product portfolio in the sector.

Q: How has trading on the actively-managed products gone so far?

A: Although trading in actively-managed funds is still relatively new to Deutsche Börse, XTF is already a very dynamic trading segment. The high number of daily trades in individual funds - for example biotech funds with up to 300 trades - points to a high level of retail investor activity.

Q: Are there any lessons you think U.S. fund managers or regulators could take away from the European experience with those products thus far.

A: Trading in ETFs has shown that investors are interested in funds that they can buy and sell at any time from an exchange. Fund trading, particularly in more volatile segments, shows that even moves in intraday share prices can be used to the investors advantage. However, the most important thing for the trading of ETFs are rules and regulations that ensure transparency. Deutsche Börse's XTF segment requires comparative mechanisms such as benchmark indices, monthly performance reports, and monthly publication of the 10 largest positions in its portfolio. Liquidity in XTF is also assured by the presence of designated sponsors on the Xetra electronic trading platform.

Q: What do you say to concerns about the active products' transparency/ disclosure?

A: Deutsche Börse's XTF segment offers the most transparency one could reasonably expect. Investors can compare the daily price of a fund with its NAV (Net Asset Value), as well as measure the performance of the fund against benchmarks indices. Each fund is required to publish monthly reports with detailed information about performance, strategy and the ten largest positions in its portfolio.

Q: American readers are relatively unfamiliar with European Index Certificates. How do these products compare to American Mutual Funds and, more specifically, what advantages do ETFs have over certificates for European institutional and retail investors?

A: European index certificates are characterised by a partly continuous trading model with low standards of transparency. They have a limited maturity and require reinvestment after expiration. Furthermore, they are advised only for experienced investors.The advantages of ETFs are that they are continuously traded with maximum transparency, no maturity period and no investment risks at a high efficiency. The transaction costs are the same as those for shares. European mutual funds are traded once a day and also have no maturity period. However, they have no standardized transparency rules. Transaction costs are low, however front loads can be significant.

Q: Are real-time NAVs available on your index ETFs?

A: Deutsche Börse calculates real time NAVs for all listed ETFs, allowing investors to track the value of the fund during continuous trading. This information is available through data providers and on Deutsche Börse's website (LINK)

Q: Do you think ETFs remain a niche market, or do you think a revolution is under way in how mutual fund investors invest?

A: Exchange-traded funds have experienced exponential growth among both retail and institutional investors in Europe, and we expect this to continue. They are a cost-effective addition to mututal funds, and we expect them to grow in significance.

Q: What are the most important changes underway in the way the European market works…and what is the importance of this for the ETF market?

A: ETFs in Europe will profit primarily from an increased consolidation among fund regulatory bodies. An example of this is the UCITS 2, an E.U. directive aimed at fostering such cooperation through the establishment of E.U. uniform criteria for funds. In general, cooperation between individual international exchanges tends to lead to increased compatibility between the various trading systems - this in turn allows for more efficient trading. The market for indexed investments itself is growing in importance.

Q: The Deutsche Börse recently announced a significant global trading initiative. Has the exchange looked into cross-listing its ETFs on U.S. exchanges and vice versa?

A: The cross-listing of German ETF funds in the U.S. is at present impossible, as the trading in German funds in the U.S. still requires SEC approval. As the structure of German funds is itself very complex, it is unlikely that the SEC will grant approval in the near future. The cross-listing of U.S. exchange-traded funds on Xetra seems equally unlikely, as this also requires approval from the German regulatory body BaKred. The GlobalMarkets Concept recently announced by Deutsche Börse will facilitate the trading of selected U.S. shares and options on our electronic trading platform Xetra. This is expected to include trading in euro-denominated ETFs based on US indices such as the Dow Jones Industrial Average.

Q: How does the creation and redemption process of index ETFs in Europe differ from the process used in the U.S.? How does the process work for the active ETFs? Can an investor exchange his shares for cash at NAV when the market is closed?

A: We are not aware of any significant differences between the creation and redemption processes of European and American index funds. However, in Europe the issuer of a fund is required to follow different legal requirements in every country. Due to the unknown portfolio positions in actively-managed ETFs, the creation and redemption process does not take place. Fund units are exchanged for cash and delivered to the market maker, who then places them in the Xetra order book. The investor can also buy and sell fund units at the NAV price directly from the fund issuer.

Q: What sorts of sector, style, and size index ETFs might we expect to see launched on the Deutsche Börse in coming months/years?

A: In the coming months investors can expect further index ETFs based on segments of STOXX Indices as well as NEMAX segments. Size index ETFs such as DAX-, MDAX and SMI-ETF are already listed. Should style indices become more popular in Europe, we could certainly expect such index funds.