Jul 30, 2012
Let’s hear it for the ETF
The rising popularity of exchange-traded funds (ETFs) around
the globe is helping to democratise the world’s capital markets, according to
Ana Concejero, head of ETF sales EMEA at agency broker Knight Capital Europe.
Based essentially on a basket of securities, often
benchmarked to an index, an ETF offers investors a simple, easy-to-use solution
that avoids the complexity of stock-picking. Hired by Knight earlier this month
to focus on client development and opening new markets, Concejero previously
spent eight years in BlackRock’s ETF division, where she was director and head
of Latin American and Iberian capital markets, together with BlackRock’s New
York-based delta one, ETF and Latin American desks.
“ETFs have become very commoditised,” she says.” The number
of ETF issuers is rising. Active strategies are not performing, so there is a
trend towards passive strategies such as ETFs. They are inexpensive, and they
are democratic. A whole range of participants can access these products,
because they are readily available through the exchanges. They offer a huge
range of investment possibilities in different asset classes and markets. This
is very appealing for investors that before, had more challenges to access
certain asset classes or certain markets.”
A growing market
Trading venues around the world have been quick to embrace
the lucrative market represented by ETFs. In London, February saw the launch of
a new UK-based multilateral trading facility (MTF) called Navesis-ETF that lets
institutional traders, sell-side firms and market makers trade intraday and at
auction using net asset value prices in the ETF primary market. Meanwhile in
Asia, many exchanges have set targets to increase the number of ETFs they list;
Japan’s Tokyo Stock Exchange listed its one-hundredth ETF last year.
Part of the appeal of ETFs is their relatively low cost to
investors. Earlier this year, a US study by agency broker ITG found narrower
spreads and lower volatility in ETFs compared to their stock equivalents – 1bps
spread and 17% average 60-day historical volatility for the SPDR S&P 500
ETF, for example. Trading costs based on an implementation shortfall benchmark
saw ETF fees ranging from 1-3bps for an IS benchmark, compared to 6-60bps for
non-ETFs. In other words, ETFs can be considerably cheaper to trade than
conventional stocks. ETFs are also versatile, as Concejero explains.
“ETFs work well as a complementary instrument towards other
strategies,” she says. “We are seeing more and more sophisticated investors
selecting active managers that use ETFs to complete the strategies that they
have put together. Hedge funds that need to get in and out of the market
quickly often use ETFs to help hedge their positions.”
Trouble ahead?
Some parties are concerned about a possible lack of
transparency in ETFs – a worry which has crystallised into regulatory action in
Europe. Earlier this month, European regulator the European Securities and
Markets Authority (ESMA) published guidelines for ETFs. The guidelines set out
the information that should be given to investors about index-tracking UCITS
(funds for retail investors) and UCITS ETFs; they also set out the criteria for
financial indices in which UCITS may invest.
ESMA published the guidelines following a review of the
current regulatory regime, which was found to be “insufficient” to address the
risks associated with these kind of funds and trading techniques. The financial
watchdog had been concerned to improve transparency in ETF markets. Under the
new rules, UCITS that are classified as UCITS ETFs will have to carry the
identifier UCITS ETF in their name, as well as ensure appropriate redemption
conditions for secondary investors by opening the fund for direct redemptions
when the liquidity in the secondary market is lacking. But according to
Concejero, the onus is still on the investor to understand the product they are
using.
“Investors need to select the instrument that fits with
their investment strategy,” she says. “The way the product is constructed may
vary – they need to understand the difference between the product they have
chosen and other products benchmarked to the same index, for example.”
ETFs at bay
Currently, not all ETF trades are reported but this could
change under MiFID II if proposals to treat reporting of ETF trades like equity
trades are upheld. MiFID II, which is likely to come into force by 2014,
presently favours a commercial approach to the creation of a consolidated tape,
with providers basing products on pre-defined standards set by the legislation.
In May, iShares, the ETF provider owned by Blackrock, teamed
up with Bloomberg to offer a consolidated tape for ETFs designed to improve
transparency and limit the impact of market fragmentation. The offering
aggregates data for European iShares ETFs and allows investors to see the best
bid and offer prices where liquidity exists.
Knight Capital currently offers its own ETF-focused team, of
which Concejero is part, designed to assist market participants to execute
their ETF strategies efficiently. The team also works with issuers to help
develop new ETFs to cover various market segments across multiple asset
classes.
“We see our growth in providing more value to
investors taking their first steps in ETFs,” she said. “There is a significant
trend towards indexing, with more players developing passive investment
strategies in the form of ETFs. Getting the right execution in ETFs is becoming
more valuable every day – and the range of possibilities only adds to investor
choice.”
Elliott Holley
+44 (0)20 7397 3820
elliott.holley@information-partners.com