We missed this when it first came out in December — but ETF Securities, the ever innovative exchange-traded fund provider behind many pioneering steps across the ETF-product spectrum — has come out with something called a ‘third generation ETF platform’.
Confused by the name? So were we.
Here’s how ETF Securities, which teamed up with BofA Merrill Lynch, Citi and Rabobank on the project, described the offering:
The idea was inspired by investor demands for increased levels of transparency, liquidity and counterparty risk management.
ETF Securities identified that the current ETF issuance model by single financial institutions could be strengthened by diversifying index replication across a consortium of the strongest financial players and concentrating liquidity within a single platform issued by an independent ETF issuer.
ETFX offers a total of 21 equity ETFs comprising Europe’s first ETF platform concentrating on resource-equity ETFs and double leveraged (2x) and double short (-2x) ETFs. These ETFs are listed across 5 European exchanges (the London Stock Exchange, Deutsche Borse, NYSE-Euronext Amsterdam, the Borsa Italiana and the Irish Stock Exchange) and traded in up to 3 currencies (USD, EUR and GBP).
They are part of the ETF Exchange initiative driven by client demand for increased liquidity, innovative products and reduced credit risks and counter-party exposure. The ETFs are all swap-backed ETFs using multiple counterparties, allowing more efficient tracking, with collateral being held in excess of UCITS1. This issuance model is arguably amongst the most efficient and risk averse available today.
In short, it’s ETF Securities’ response to “investor demands” for a solution to the current counterparty-risk problem posed by swap-backed synthetic ETF structures.
Which happens to be an issue close to FT Alphaville’s heart; and one we’ve flagged up on numerous occasions before.
In that respect, we do commend ETF Securities for coming to the market with the above solution.
Although, at this point, we would stress the countless times synthetic-ETF providers told us our concerns over “counterparty” or “transparency” issues were ungrounded, the models were pretty much faultless and clients were overjoyed by their overall efficiency.
The ETF money spinner
It’s also worth pointing out we arrived upon the story on Monday on news that Barclays Capital was joining the ETFX platform consortium too.
This fact struck us as particularly interesting considering it wasn’t that long ago Barclays famously sold off its iShares ETF business to Blackrock as part of its Barclays Global Investor divestment.
What’s more, quite separately, we had heard a theory that in the long-run Barclays stood to gain much more from not owning iShares anyway. That’s because without an association with iShares Barcap could freely trade against other ETFs, including iShares — a practice far more profitable than just earning management fees.
By ‘trading’ we of course, refer to the practice of market-making and arbitraging ETFs as authorised participants too.
Furthermore, owning iShares, we were told, presented Barclays Capital with a conflict of interest as far as providing services to the wider ETF industry.
With the ETF market transforming into one of the fastest growing asset classes out there, it’s understandable Barclays might have been torn between its position as an ETF provider and its want to be an ETF trading counterparty. In that sense, it’s arguable the business was always more suited to a dedicated asset manager like BlackRock.
BarCap’s involvement with the ETFX platform consequently marks the group’s first concerted step into the lucrative yet low-risk ETF “market making”, “authorised participant” and “swap issuing” business — a business one could argue is by and large all about flow.
Not that BarCap was alone in ‘wanting’ in on this lucrative part of the ETF game.
ETFX looks to have been designed with late entrants to the ETF industry specifically in mind — at least if you look at the other financials involved.
And all in all it is a genius move by ETFS.
Not only does it address the problems associated with synthetic ETF products already on the market — meaning it does have a unique selling point — it caters to late entrants’ desire to ‘get in’ on the game, while dissuading them from listing their own synthetic-styled offerings on the market too.
This is important because too many competing products only disperses client flow and liquidity. That’s the ultimate nail in the coffin for all ETFs involved.
Related links:
The rise of synthetic ETFs – FT Alphaville
Statistical arbitrage and the big retail ETF con-fusion – FT Alphaville
The Hidden Risks of ETFs - Money Morning