Investors drive growth rates and embrace new products

The etfexpress Awards 2015 for excellence among managers and service providers of exchange traded funds celebrate the achievements of firms that contributed to another year of significant growth in assets for the sector.

The awards, presented on 26 February in Mayfair, London, were based on nominations from investors and managers as well as other industry professionals at firms including fund administrators, custodians, accountants, law firms, consultants and distributors.

According to the latest figures released by ETFGI, a London-based ETF research consultancy firm, assets invested in ETFs/ETPs reached a record high of USD494.8bn at the end of February 2015. Europe’s ETF/ETP industry now has over 2,000 products and 6,420 listings from 50 providers, listed on 26 exchanges, across 21 countries. 

These are certainly exciting times for all ETF market participants as the investor community continues to deepen its knowledge and adoption of these flexible fund products. 

Christopher Meyers is Head UK & NED Institutional Trading at Flow Traders, a global independent ETP liquidity provider headquartered in Amsterdam and winner of this year’s award for best European ETF Market Maker. Flow Trader provides continuous liquidity for ETPs through its membership of more than 90 global stock exchanges and trading venues worldwide. 

“Approximately 27 per cent of the US funds industry is passive, of which around 14 per cent is represented by ETFs. In Europe, the figures are 12 per cent and 6 per cent respectively so there is still huge growth potential in Europe. MiFID II will help a lot, so we are excited about the future. We hope to see the market here grow by about 20-25 per cent a year for the next four to five years,” says Meyers.

According to Fannie Wurtz, Global Head of ETF & Indexing Sales, Amundi – winner of this year’s best Fixed Income (excluding cash) ETF Manager – the aim is to double its total ETF & Indexing assets under management in the next three years to stay ahead of the pace of European market growth.

“We expect the ETF market to grow by 20 to 25 per cent in 2015 and the fixed income ETF market to continue to develop. Therefore, part of Amundi’s strategy is to continue to launch innovative new products,” confirms Wurtz. “There is still plenty of room for further innovation within the fixed income ETF space. This is what we’ve been doing with our lowest rated and floating rate products; they offer a clear value proposition to investors. We have plenty more ideas on how to further develop our products in 2015.”

One firm that has long been a pioneer of ETFs, in particular smart beta ETFs, is US firm Invesco PowerShares, the 4th largest ETF provider in the US and globally and winner of this year’s award for best Smart Beta ETF Provider. 

Invesco PowerShares now offers an unprecedented 82 smart beta ETFs, perfectly illustrating the core belief since its inception 13 years ago that all investors should be provided with a smarter way to access the markets – beyond traditional active and passive strategies and across asset classes – be it equity, fixed income, or alternatives. 

“The very first ETFs that PowerShares launched were consistent with this belief and the concept of smart beta (which PowerShares originally labelled as ‘Intelligent Indexing’) imbues much of our product line today,” explains Dan Draper, Head of Invesco PowerShares. “In a dynamic marketplace where firms are making claims about their smart beta ETF strategies, we believe the existence of an established track record is very important. The fact that nearly 75 per cent of PowerShares smart beta ETFs have at least a five-year track record provides investors the opportunity to evaluate performance across what we believe could only be described as a full market cycle.  

“We believe smart beta will continue to grow rapidly in the coming years as investors gain an understanding of how these strategies can be implemented in a portfolio.”  

A recent report written by SEI’s Investment Manager Services division entitled ETF 2.0 – Six Trends Shaping the Next Generation, identified Active ETFs – of which smart beta funds are a sub-set – as a key trend, in addition to ongoing convergence of mutual funds and ETFs. 

On this last point, Northern Trust – winner of this year’s best European ETF Fund Administrator – has, over the last 12 months, started to help mutual fund houses bring ETF products to market, one of which was the establishment of an exchange traded share class; the first of its kind in Europe. 

According to Fiona Moore, Northern Trust’s Head of ETF Fund Administration, Europe, this move by mutual fund houses into the ETF space represents a potentially significant stage in the evolution of Europe’s marketplace. It is, says Moore, an important strategic initiative for Northern Trust in 2015. 

What is critical, however, is that any such product offering helps rather than hinders these mutual fund houses. 

“The term ‘complementary’ is key. They already have a specific distribution channel and investor base so if they are adding ETFs to their existing product range they have to ensure it is done so in a complementary way. That’s something that is critical to get right and where we can work with them to help advise them appropriately. It shouldn’t be seen as a negative to launch an ETF in the eyes of their existing mutual fund investors,” says Moore. 

As ETFs become more widespread and sophisticated, it is imperative that administrators deliver timely, accurate data to authorised participants involved in the creation and redemption process. At Northern Trust, this has always been an integral part of its technology infrastructure. 

“Since the early days of servicing ETFs, we have had a dedicated AP servicing team that works with the APs, ensuring they have a seamless day-to-day process from trade booking to settlement. It really is an integral part of our service and operating model. If APs are receiving what they need from an information perspective in a timely and accurate way, it ensures that the ETF sponsor can focus on distribution and make the product as successful as possible,” notes Moore.

Another firm that is bringing greater efficiency and automation to ETF providers and APs is State Street – winner of this year’s award for best North American ETF Fund Administrator. State Street is the largest global administrator of ETFs, servicing close to 1,000 ETFs that represent over USD600bn in AuM. 

The State Street Global ETF Platform provides real-time transparency to State Street’s clients, giving them the opportunity to view and approve the ETF basket online. The Global Platform provides alerts and notifications to State Street’s ETF operations enabling them to monitor the workflow electronically. In addition, its Fund Connect platform automates the AP creation / redemption process when orders are placed. 

“Our technology is one aspect of our superior service offering compared to our competitors. Two other important aspects are our institutional knowledge and thought leadership. We have been servicing ETFs since the first product ever and continue to assist our clients innovating in the space. We also provide newsletters and market perspectives reporting as an added-value service to our ETF clients,” states Phillip Nanof, Vice President, State Street Global Services.

Part of the growing attraction of ETFs is their low cost and the ability for investors to gain access to flexible strategies that are capable of bringing enhanced returns to their portfolios. This has perhaps never been more important today than in the fixed income space, where central bank activity has driven rates to near zero; far from ideal for investors holding cash. 

To tackle this problem head-on PIMCO – winner of this year’s award for best Fixed Income (Cash) ETF Manager – in partnership with Source, a leading ETF provider, has developed a series of short maturity actively managed ETFs to generate enhanced returns: 

• PIMCO Euro Short Maturity Source UCITS ETF 

• PIMCO Sterling Short Maturity Source UCITS ETF

• PIMCO US Dollar Short Maturity Source UCITS ETF

Given the situation in Europe, it’s little surprise that PIMCO has seen good inflows into its euro cash product as investors look to retain capital preservation. 

“We also see demand on the dollar side as base rate in the US still remains low. PIMCO’s global presence allows us to look for opportunities in US dollar paper issued by companies globally. As of February month-end, the US dollar short maturity ETF offers a yield of 1.43% versus a US base rate of 25 basis points,” says Howard Chan, PIMCO’s ETF product manager in EMEA. Right now, Chan says that they are more defensive on core duration risk in euro-based strategies and are more focused on credit spreads. 

“We see many opportunities in Europe. For example, in 2014 a good contributor to performance was short-dated peripheral covered bonds. This is a fairly low-risk asset class, with collateral backing the securities and offers a yield premium relative to their sovereign equivalents. ECB’s purchase programme provided price support for the asset class. Investors are able to benefit from higher relative yield, plus price appreciation, on these bonds; and that’s how we are able to generate above benchmark returns,” concludes Chan. 

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James Williams
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