French market regulator AMF has released a study on the local exchange-traded funds (ETFs) market, analysing trends and risks within the segment.
France remains one of the four largest jurisdictions for European ETF domiciliation (with 13% of European assets in Q3 2016), alongside Ireland (56% of assets), Luxembourg (17%), and Germany (10%).
The market in ETFs listed on Euronext Paris consists of 477 funds with total assets under management of €103bn at end 2016.
Between 2014 and 2016, the French ETF market has risen by 66%, mainly due to a significant increase in inflows.
Some 118 new ETFs were listed on Euronext Paris in the same period, while 97 were delisted, for a net creation of 21 ETFs. This accounts for 15% of the change in assets under management.
ETFs listed in France primarily focus on equities (83% of assets) then bonds (16% of assets) and commodities (1%). AMF observed that the shares of other ETFs (currency and alternative) remain “entirely insignificant”.
Among equity ETFs’ assets in France, 40% have been into European equities’ passive vehicles whereas ETFs solely made up of French equities form 6% of equity assets, mainly through CAC40 ETFs.
“By comparison, Euro Stoxx 50 assets are twice as great. There has also been a sharp increase in S&P 500 assets, which at end-2016 slightly exceeded Euro Stoxx 50 assets at €11bn,” explained AMF.
Regarding bond ETFs in the French market, those focused on European issuers account for 84% of assets. A further breakdown in this segment shows that sovereign bond ETFs represent 51% of assets versus corporate bond ETFs at 29%.
Also ETFs exposed to high yield and emerging markets, regardless of issuer nationalities, hold assets of almost €1bn.
Trading volumes for French ETFs in 2016 amounted to €634bn, of which €446bn was OTC (71% of volumes) and €57bn was on Euronext Paris (9% of volumes), the regulator reported.
AMF has looked at ETFs’ impact on their underlying assets as well as on the underlying markets themselves.
Key points in the regulator’s research are that circuit breakers implemented on the Euronext Paris market can contain the risk of significant divergences between the traded price of an ETF and the immediate net asset value of the underlying basket.
Therefore the mechanism limits a risk of decorrelation from the underlying index.
Also the ETF take-up on Euronext Paris appears insufficient to have a significant impact on underlying markets in the event of units being redeemed.
AMF’s study suggests that subscriptions and redemptions of ETF units appear counter-cyclical, thus serving to dampen major price movements rather than to amplify them.
Nevertheless, AMF assesses that in the event of a continued sharp rise in ETFs inflows, sustained vigilance will be required during periods of market stress.
“During such periods, ETF units are liable to trade at a significant discount, and correlation effects can amplify volatility on underlying markets,” AMF underlined.
Read more about the study here.