Riding the wave

A stream of new entrants has swept into the ETF market this year, while existing participants have bolstered core offerings and rolled out more specialised products. Victoria Hartley charts the development of the industry in 2009

Source

Source, the exchange-traded product (ETP) provider in partnership with Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley and Nomura, has been a significant new entrant in the ETP market this year, attracting over $2.8bn in assets under management (AUM) since launch. 

The issuer listed its inaugural range of 13 ETFs and 22 T-ETCs on the Xetra segment of the Deutsche Boerse in April. In June, the provider launched its physically-backed gold product, the Gold P-ETC, with a management fee of 0.29%. Source subsequently unveiled 18 European super sector indices in partnership with index provider Stoxx in July, which have attracted $1.4bn, or 14% of the sector market in three months, according to Source director of marketing Michael John Lytle.  

He said Source has strategically developed the structures of its funds to remove index tracking-error and reduce counterparty risk, while the partner banks have also developed the ability to short its products. 

Lytle added: “The whole idea is to deliver a neutral structure. We created a swap-backed structure with several providers – in our case four banks.” Source removes the provider’s 10% equity or fixed income provision and instead caps this at a maximum of 4.5%, split between the four counterpart banks. The swaps are also regularly reset to zero. 

Lytle said trading the fund is important in order to keep liquidity, as a greater turnover leads to tighter bid-offer spreads. He added: “For larger institutional traders, there is a problem if there is no liquidity in these products.” Source has signed up more than five new market makers to achieve liquidity, including Nyenburgh, and is in talks with another ten.

Source’s latest offering, the S&P GSCI Crude Oil Enhanced T-ETC, is secured by US Treasury bills and is linked to the S&P GSCI Crude Oil Enhanced index. The enhanced oil product dynamically moves along the futures curve in order to reduce the negative impact of roll costs. 

Credit Agricole Structured Asset Management (CASAM)

CASAM assertively launched into the ETF market in September 2008 and now has 65 ETFs listed on NYSE Euronext with AUM of €3bn. 

In March, CASAM unveiled a range of MSCI European funds, a short CAC fund, a selection of country funds including India and China, and its first EONIA money market offerings. A flood of new ETFs followed, including a FTSE 100 fund, a MSCI World Energy fund, a REIT ETF, and a range of short ETFs in October.

“Our first headline is our lower management fees and tighter spreads,” said Valerie Baudson, managing director of CASAM ETF. She added: “We also benefit from the Credit Agricole name because more and more clients are extremely interested in counterparty risk and which provider is actually offering the fund.” She said this is one of the key reasons for CASAM’s success in its first year.

The provider has set out its stall with swap-based products and immediate dividend investment. Baudson said product launches are based more on market timing than innovation, once a broad offering had been established. 

She said: “We knew after 2008 the market would be quite cautious, which is why we produced fixed income and money market funds. Now, the market is favouring equity again.” Yet she added this has been the year for emerging markets and commodities as well as fixed income in terms of launch trends. 

Credit Suisse

Credit Suisse is another of several players decisively targeting the European ETF market this year. Although the bank is a big name in the Swiss ETF arena with €6bn in AUM, it is now expanding its Xmtch platform into other European countries. In October, Credit Suisse made its first foray into another market, issuing 17 ETFs in Italy, more than doubling its global range. 

“As Italy is one of the biggest trading markets for ETFs in Europe, it is understandable that we went to Italy first to leverage a known brand with sales forces already on the ground,” said Thomas Merz, senior ETF specialist, responsible for Credit Suisse Xmtch marketing and distribution.

The firm subsequently launched its ETF platform into Germany in late November, and is set to expand into the Benelux countries shortly before it enters into the UK. However, no set timeline has been arranged due to the intricate nature of the listing process, Merz said.

He added: “We want to be the ETF manager that offers a meaningful range of investment building blocks.”

Credit Suisse is currently assessing the value of adding FTSE 100 ETFs for retail investors and complementing its MSCI range with some of the other well known indices, although its product offering is currently weighted largely in favour of institutional investors, by around 70%. 

HSBC

HSBC launched its first European ETF, the HSBC FTSE 100 fund, on the London Stock Exchange (LSE) in August. The bank released its second product, the HSBC DJ Euro Stoxx ETF in October, and plans to launch a comprehensive range of ETFs marketed across Europe over the next two years. HSBC may be new to the European ETF market, but it is already well-established in Asia. The bank said it has 8% of the region’s ETF assets, in partnership with Hang Seng bank and through its global asset management arm in Hong Kong.

Although both of HSBC’s ETFs are cash-based, the bank will offer both fully replicated and synthetically replicated products, according to Farley Thomas, HSBC global head of wholesale. He said HSBC’s Global Markets arm acts as the main market maker and HSBC Security Services provides custody and fund administration. 

Thomas said the bank’s entrance to the market should reassure investors that ETFs are manoeuvring into the mainstream. He said: “Every big financial firm offers investments, but is not necessarily focusing on ETFs.” He added: “We hope to stand out as one of the big high-street names in ETFs. What the financial crisis has done is make investors look at who stands behind a product.”

EasyETF, BNP Paribas

EasyETF prioritized geographical expansion and completion of its core fund range in 2009, according to Danièle Tohmé Adet, head of product development at the BNP Paribas-owned issuer. 

She explained after the G20 stimulus package, EasyETF prepared for increasing investment into the environmental, alternative energy, nuclear and agriculture sectors, in order to tap the growth potential. 

In January, the provider launched its first low carbon ETF. BNP Paribas Asset Management partnered with carbon emission specialist Trucost and the exchange Euronext to create a benchmark from the Stoxx universe, which included the most carbon-efficient companies across all sectors. 

In mid-2009, EasyETF released a range of double short ETFs using synthetic replication. Tohmé Adet explained the fund is a daily double-short, which provides two times the inverse of the daily index performance and is reset to zero at the end of each trading day. She said investors have to monitor their delta, or the change in the price of funds and the underlying, around once a week. 

ETF Securities

The difficulties ETF Securities (ETFS) experienced in late 2008 are well documented. “We had $4bn unsecured with insurer AIG, which was credited with a triple-A rating when ETFS began working with them. The night before the firm was rescued by the US Federal Reserve, it was still double-A rated,” said Nik Bienkowski, chief operating officer at ETFS.

While ETFs are backed by collateral as required by Ucits regulation, ETCs are securities as opposed to funds and are therefore not required to meet this Ucits stipulation. However, Bienkowski said changes have since been made to fully collateralise the ETCs with bonds or equities. He added: “We based the improvements on investor feedback to assure ourselves that we have achieved that development satisfactorily.”

ETFS passes on the cash to its counterparties to manage the investment exposure for the ETFs and ETCs, and the counterparties provide collateral, including double-A or triple-A rated bonds, covering up to 110% of the value of the cash.

The provider’s latest offering, launched in November, includes 18 collateralised currency ETCs providing long or short exposure to G10 currencies. The ETCs are listed on the LSE and track MSFX Currency indices. The ETCs also offer exposure to local interest rates and FX movements between the respective currency and US dollars. 

Bienkowski said: “Currencies have been one of the best performing asset classes, along with commodities over the past one, three and five years. Currencies also have low correlation to other asset classes and low volatility, making currencies an asset which can improve portfolio performance through increased diversification.”