A useful tool to open up the market

The last 12 months have been a tough time for Europe's active fund managers, with Lipper data recording net outflows for the entire industry to the tune of €280m (£220m) over the year to May.

In fact, the numbers show negative fund flows for consecutive months as far back as August 2007.

Instead of seeking out alpha-generating benchmark beaters, investors have been putting their cash into ETFs and ETCs.

According to Lipper's figures, these vehicles have seen just one month of negative flows in the last year.

And while the amounts are not huge – the net intake for the year was €33.75m – they have been steadily growing since the summer's credit crisis.

Manooj Mistry, head of db x-trackers UK, believes this is part of a general shift towards greater adoption.

“In the US, where ETFs have been established much longer than in Europe, they are taking market share from traditional passive funds – and that share has been growing over a number of years, in the retail market as well as pensions.”

The growth in commodities ETFs has been particularly strong, going from €1bn two years ago to €9bn last month.

And although Mr Mistry believes ETFs will never replace active managers, he argues they can offer investors a cheap beta-generating alternative to laggards.

“You don't have to settle for second-best active managers,” he says. “You can use ETFs for index exposure, and then pick or choose one or two active managers who do outperform.”

ETFs currently account for 5-6 per cent of total assets under management in the US, says Mr Mistry, while in Europe it still hovers around 1-2 per cent. “There has been very little penetration so far,” he says.

Of that figure, retail and individual investors account for 10-15 per cent, while in the US 60-70 per cent of new inflows come from the retail space.

“It's higher in the US because financial advisers work on a fee-based model, whereas in Europe it is more commission-based,” he says. “But in markets like the UK and Germany, the number of fee-based advisers is increasing, and with that we will see more penetration in the market.”

Andrew Merricks, head of investments at Hove-based IFA Skerritts Consultants, agrees take up in the intermediary market is down to the firm's fee structure. “If you are commission-based, you are not going to look at them because they don't offer any. If you are fee-based, why wouldn’t you use them because they are immensely useful tools.”

Mr Merricks says he never recommended trackers “because you are paying quite a lot for something guaranteed to underperform”, but he uses a wide range of ETFs and ETCs to gain exposure both markets that are difficult to outperform, such as US equities, and asset classes traditionally inaccessible to retail investors - specific commodities such as lean hogs or physical platinum, or single-country emerging markets such as Brazil or China.