Worldwide boom in investments in ETPs
ETPs emerged at the start of the nineties. They offer various advantages to investors: they can be bought simply and at relatively low cost through the exchange and they are highly suitable for investors wanting to spread their portfolios across different asset classes. This partly explains why they have experienced huge growth since their introduction. The worldwide market grew to USD 2,083 billion (EUR 1,627 billion) in outstanding ETPs in the first quarter of 2013, from USD 79 billion in 2000. In 2012 the worldwide ETP market grew by 27%. The ETP market is highly concentrated: at year-end 2012, the three largest suppliers together held a market share of 69.4%. At that time, around 150 ETPs were listed on Euronext Amsterdam.
Risks to financial stability
Exchange-traded products include exchange-traded funds (ETFs), which use synthetic replication. Synthetic ETFs are funds that do not actually own the equities in the index that they track. In order to achieve a performance in line with the fund’s benchmark index, swap agreements are concluded with one or more counterparties, which entails various risks. First of all, the counterparty in the swap is often the same bank that offers the ETF, which means that investors are exposed to high risks if that bank falls into danger of defaulting. In addition, some of the new ETFs are fairly complex and difficult to understand. One may well wonder whether nvestors really understand the product that they are investing in. These and other risks explain why ETFs have caught the attention of the European supervisory authorities. Due to stricter regulations, synthetic ETFs are very scarce in the United States, but they are allowed in Europe.
The Dutch ETP market
Although the Dutch ETP market is very small and there are hardly any ETPs based in the Netherlands, it is showing strong growth. In 2012, the joint capital of Dutch ETPs climbed to EUR 137 million from EUR 70 million in 2011. Dutch investors mainly invest in foreign ETPs. Investments of Dutch investors in foreign ETPs in 2012 increased to EUR 4.1 billion from EUR 3.9 billion in 2011 (see Figure 1). Investors are mainly interested in physical ETPs, i.e. ETPs that own the underlying asset.