"ETFs are ideally suited to today's investment world"
Gillian Walmsley, Head of Fixed Income and Listed Products
Exchange Traded Products have experienced meteoric growth over the past decade and London Stock Exchange Group is a leading player in European markets.
Exchange Traded Products (ETPs) are ideally suited to today’s investment world, where attention to costs is more widespread than ever before. Diverse, transparently priced and accessible, ETPs appeal to a broad spectrum of investors.
London Stock Exchange is well positioned to benefit from their attractiveness, and in the last year has become the most popular European market for listing ETPs..
“London’s position as a leading international financial centre, offering a large pool of institutional liquidity and helps give us a leading position in the European ETF market,” says Gillian Walmsley, Head of Fixed Income and Listed Products at London Stock Exchange.
ETPs have grown by leaps and bounds over the past two decades. First launched in 1993, the market was valued at more than $2 trillion by the end of 2013. London Stock Exchange launched its first ETP, a FTSE 100 index, in 2000. Today, it offers more than a thousand products.
ETPs fall broadly into two categories: ETFs and other ETPs which include Exchange Traded Commodities (ETCs). ETFs can track an index relating to a wide range of asset classes, including equities or ﬁxed-income.Other ETPss often track commodities, currencies and other markets.
Both ETFs and other ETPs are listed on a stock exchange and trade like shares. In late 2013, London Stock Exchange had over 685 ETFs, offering investors exposure to the stock markets of economies as diverse as Brazil, Taiwan and Australia. It also has more than 360 other ETPs, which investors can use to buy exposure to the coffee they drink at breakfast, the wheat in the sandwich they have for lunch, the currency they spend and the natural gas that warms their home at night.
“The growth in the range of ETPs has been phenomenal”, says Walmsley. “There are now ETPs for pretty much every underlying asset class.”
Broadly based, reasonably priced
ETFs are generally invested in a wide range of assets within the same market -- most commonly a market defined by an already established index. Investing in a single ETF therefore, may carry less risk than investing in an individual company’s security. ETPs also allow investors to quickly assemble a portfolio spread across a range of asset classes. For example, by buying only four ETPs listed on London Stock Exchange, investors can gain exposure to the US, UK and Eurozone stock markets, and to gold -- a hedge investors often use against stock market falls.
ETFs have the added virtue that they are typically cheaper than traditional passive funds. The average Total Expense Ratio (TER) of an equity ETF -- the total cost to the investor, after allowing for all charges -- is only 0.39 percentper cent, according to Morningstar Research, compared with 0.73 percentper cent for a retail index fund. Equity ETF costs are similar to those of institutional index funds. The average TER of fixed income ETFs, at 0.23 percentper cent, is lower than for retail index funds at 0.35 percentper cent, and even than for institutional funds, at 0.28 percentper cent.
In relations to commodities, investing in an asset class outside the ETC structure is simply not feasible for many investors as it involves buying commodities futures contracts, which requires a budget beyond the reach of most individuals.
In 2006 London Stock Exchange became the first exchange to offer multi-currency trading for ETPs., Multi-currency trading plays a key role in attracting dollar-based investors because virtually all international commodity markets are priced in dollars and many investors do not want to add currency risk to the risk of the underlying commodity market in which they have invested.
FTSE Group, is also well positioned to grow in the ETP market. In 2012 and 2013, Vanguard Asset Management, one of the world’s largest providers of ETFs, switched six ETFs accounting for $170bn of assets from rival index provider MSCI to FTSE.
Slawomir Rzeszotko, ETF Capital Markets Manager at Vanguard in London, says: “This switch had a lot to do with the fact that FTSE continuously monitors the quality of its indices. It has a very strict view about what a good index needs.”
This includes, he says, frequent rebalancing of the indices’ constituent parts, and weightings for securities which reflect the number of shares which are free-floating.
“Essentially, we made the switch because FTSE offered the best quality for our customers” says Rzeszotko.
In the vanguard
The Vanguard agreement could prove a key moment for the ETF market.
“After the Vanguard deal, we have seen growing interest among asset owners in switching their index provider,” says New York-based Jonathan Horton, President of FTSE North America and Chief Marketing Officer for the FTSE Group.
“We want to improve our the service we offer our customers,” says Horton.
He believes that FTSE can do this by building on its brand name and its historical strength in areas of increasing interest to investors, such as China, other emerging markets, and real estate.
More than half the global ETF assets invested in China are linked to the FTSE China index, a statistic that augurs well for the future. Over the next decade China is set to become the world’s largest economy, which is likely to create spectacular growth in the China ETF market.
The increasing interest among investors in using commercial real estate to complement their portfolios also bodes well for FTSE Group’s continued growth. For example, a significant number of ETFs are based on the FTSE EPRA/NAREIT index series.
More broadly, the FTSE Group and London Stock Exchange are well placed to enhance their customer offering in response to the increasing retail interest in ETFs. . In January 2013 the Retail Distribution Review (RDR) introduced changes to the commission arrangements paid to independent financial advisers (IFAs) for recommending their products. Walmsley believes the arrival of more impartial advice could encourage IFAs to look more closely at the benefits of ETFs.
“Because of RDR, we see opportunities for more private investors to become involved in the ETP markets”, says Walmsley. “The London retail market in ETFs is still quite small but the new regulations could change all that so we are optimistic about the future.”