Synthetic Exchange-Traded Funds in Europe

Getting Ready for Reform
by Anshuman Jaswal, PhD, January 5, 2012
Industry Trends


Europe is the leading global market for synthetic ETFs. Between 2006 and 2010, Europe had the highest levels of synthetic ETF issuance compared to the US and the rest of the world. Almost 90% of the issuance of synthetic ETFs in 2010 occurred in Europe.

In a new report, Synthetic Exchange-Traded Funds in Europe: Getting Ready for Reform, Celent discusses the evolution of the European ETF market, which has been quite different from its US and Asian counterparts. In the US, as a result of the various regulations, physical ETFs are preferred to synthetic ETFs. However, in the European market, the UCITS regulations have permitted greater freedom for the operation of synthetic ETFs.

The European ETF market has grown steadily between 2005-2011. The share of the synthetic ETF market has also grown over this period, rising from around 21% in 2005 to more than 45% of the value of the overall European ETF market in 2011.

“Synthetic ETFs seem to be cheaper than their physical counterparts, which partly explains their popularity,” says Anshuman Jaswal, Celent Senior Analyst and author of the report. “However, there are some concerns regarding their economic impact, and the European regulator ESMA is looking at the effect of synthetic ETFs on levels of counterparty and systemic risk.

This report provides an overview of the ETF market, with a focus on synthetic ETFs in Europe. A comparison of the regulatory framework in Europe with another leading market, the US, is also included in the overview. After this, the report looks at the development of synthetic ETFs in Europe and the change in market volumes in 2010–2011, which are occurring in response to volatility in the global markets, counterparty risk issues, and regulatory pressures. Finally, the report examines some of the major issues that exist as possible deterrents for investing in synthetic ETFs.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
Tel: +1 212 345 1366

Europe (London)
Chris Williams
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary




Market Overview



Synthetic Exchange-Traded Funds



Regulatory Approaches for Synthetic ETFs in Europe


Recent Developments in Synthetic ETFs in Europe


Possible Issues with Synthetic ETFs




Leveraging Celent’s Expertise



Support for Financial Institutions



Support for Vendors


Related Celent Research


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