European ETFs ended a challenging 2011 with net new assets of $18.23 billion and now have total assets of $259.88 billion, according to a year-end report from Credit Suisse.

Credit Suisse expects 2012 to be a positive year for the European ETF industry.

Moreover, the Swiss bank – Europe’s fifth-largest ETF provider – expects 2012 to be a another positive year for the European ETF industry following the recent release of draft regulatory guidelines from the European Securities and Markets Authority (ESMA), which came out broadly supportive of the industry.

Following are the key findings of the Credit Suisse report:

Political uncertainty in Europe
The lack of a comprehensive solution to the euro sovereign debt crisis continued to impact European ETFs in Q4. After a flat October, outflows accelerated in November and December. In contrast, the US ETF market – facing similar underlying macroeconomic issues to Europe – did not experience the same crisis of confidence. Most likely due to its more mature and less fragmented status, the US ETF market recorded a very different year to Europe, with inflows of $115.76 billion and only one negative month (May). The US ETF result reinforces our opinion that ETF growth will continue globally, and will gain strength in Europe when the underlying market uncertainty and regulatory scrutiny experienced here subsides.

Regulatory scrutiny intensifies
Since the publication of a European Securities and Markets Authority (ESMA) discussion paper in July addressing the risks of synthetic funds, a big divide has opened, with positive results for physically (cash-based) replicated funds and outflows mostly concentrated in synthetically (swap-based) replicated funds. Investors appear to prefer cash-based ETFs, placing $21.50 billion into physically replicated ETFs, in contrast to redemptions of $3.27 billion from synthetically replicated ones.

ETFs remain relatively attractive
Despite the negative flows in Q4, the European ETF market remains attractive to investors – illustrated by the $18.23 billion total inflows for the year – and particularly when compared to the much larger European UCITS fund industry. In contrast to the inflows recorded in European ETFs in 2011, by the end of November UCITS funds had recorded an outflow of €84.5 billion. The disparity between the performance of the two investment vehicles is even more marked due to the fact that nearly 90% of European ETFs’ AUM is constituted in UCITS funds.

Credit Suisse expects 2012 to be a positive year for the European ETF industry
On January 30th, the European Securities and Markets Authority (ESMA) clarified its position on ETFs, and this should allay some of the investor concern over regulatory risks that was prevalent in the market in 2011. Ultimately, we expect to see a return to the fundamentals of indexing, with both the industry and regulators taking further action in clarifying the risks of different types of exchange traded instruments.

The report was authored Ursula Marchioni, ETF Sales Strategist at Credit Suisse, and can be accessed here: Year End 2011 Market Commentary on European ETFs.