An hour into the press conference, the bankers and representatives from the German bourse look worn out. The journalists ask the same questions over and over again: "What will these new types of funds cost the investor? What advantages will they have over regular index-based funds?"

After two years of preparation, the German stock exchange issued Europe's first exchange traded funds in early April.

Though relatively unknown to the average investor, the new product is expected to take German and European markets by storm. EFTs are compared to roller-blading, which arrived late in Germany but quickly became more popular than in the US.

The same applies to German shareholder culture. After a long period of stagnation in the early-to mid-1990s, Germans suddenly developed a strong liking for stocks. Today, one-in-five Germans owns equities, and the trend points steeply upward.

"The US ETF market has become a map for European exchanges to follow," says Steve Malinowski, Merrill Lynch managing director. In the US, where hardly a week goes by without a new type of ETF being issued, it took roughly four years until the product took off.

Today, the average US investor is familiar with Spiders, Diamonds or triple Qs and fluent in trading them. With a daily trading volume of $8bn, ETFs have become common even among American retail investors. In the US, the overall market size has grown to $50bn and 50 new types of ETFs are planned over the next 16 months.

"Within a year, exchange traded fund will become a common term in European investors' vocabulary," says Mr Malinowski.

The German stock exchange has launched two new products, called listed diversified return securities (LDRS) or "leaders", to track the Dow Jones Euro Stoxx 50 and the Stoxx 50 indices.

In both E400m funds, cross-market hedges of Europe's leading 50 stocks from all industries, each LDR represents one hundredth of the index it tracks. The funds will also be listed on the SWX Swiss Exchange in Zurich as soon as the Swiss authorities give their approval.

"There is huge potential for ETFs in Europe. As a result, Deutsche Borse is launching XTF, an entirely new market segment in Europe that gives market participants additional opportunities for trading," says Volker Potthoff of the Deutsche Borse's management board.

Daily trading volumes have averaged E30m, up significantly from the first few days. Deutsche Borse expects to launch a variety of other products in the coming months. "The spectrum could range from the Neuer Markt (Germany's growth segment) to small caps," says Mr Pothoff.

Several banks have approached the Deutsche Borse, and a spokeswoman says "we have several more products in the pipeline". She does not deny that opposition from fund managers contributed to delays.

aintaining the status quo often hampers innovation in Europe, and some fund managers fear the new indices may put them out of a job. These developments also mean that managers have to become more "market savvy". Two years ago, the German retail investor may not have been ready for the product.

While Germany has few day traders, many Germans have opened trading accounts, switched to no-frills online brokers and direct banks, and developed a liking for high-risk technology and dotcom stock.

Compared to regular funds, buyers do not have to pay the "entrance fees" of up to 5 per cent. Some fund managers also ask for an exit fee. Meanwhile, the maximum annual administration fee for ETFs will be 0.5 per cent, possibly even as low as 0.3 per cent, says Joachim Willnow, a Merrill Lynch ETF specialist.

Since an ETF is considered a stock, investors pay a buyers commission. The listing on the bourse then allows the investor to buy and sell the product like a stock, with real-time quotes.

To rule out large fluctuations, two designated banks ensure the spread between selling and buying remains small. "A 1 per cent fluctuation would only occur during exceptionally volatile periods, while a 0.25 per cent spread would be more normal," says Mr Willnow.

Growing awareness of the fallibility of fund managers adds to the popularity of ETFs. Comparisons between the performance of index- tracking and regular funds show how the new outperform the old. Since Spiders (ETFs that track the S&P 500) were issued, the S&P 500 has gained 300 per cent, while fund managers tracking S&P stocks only managed a
gain of 247.

In Europe, similar studies had similar results and proved that most funds perform worse than the respective benchmark.


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