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DB Global Equity Index & ETF Research : The changing face of equity beta investing: ETFs, Futures & Total Return Swaps
August 25, 2010--ETFs gain ground over futures
Exchange-traded fund (ETF) and futures trading on eight of the most popular equity indices has continued to register strong interest from investors throughout the past three years. European domiciled ETF assets tracking these eight popular equity indices total over €55 billion, while futures open interest (3 month rolling average notional) totalled over €300 billion for the same period. This strong equity beta investing trend has been driven by a back to basics mentality that has motivated investors to seek refuge in the familiar, despite elevated levels of equity market volatility.
Even though equity markets declined by an [ETF asset-weighted] average of 30% for the period 31/7/2007 to 30/6/2010, ETFs doubled their assets in the same period.
The growth of ETF assets tracking these eight popular equity indices is consistent with the overall ETF market growth over the same period (110%). While the futures market for the same benchmarks remained much larger than ETFs, open interest notional as of Q2-10 [for five of the eight tracked indices] was 0.7 times as compared to that at the beginning of the period. These numbers indicate fundamentally different growth rates between futures and European ETFs tracking popular equity indices.
Futures still dominate the mainstream equity index space with their respective open interest being more than six times that of the relevant ETF AUM, without accounting for US domiciled S&P500 ETFs that totalled over €100 billion for the same period. Accounting for US domiciled S&P 500 ETFs, ETF assets are half of the respective relevant futures open interest notional as of the end of Q2’10.
ETFs are increasingly gaining ground and are becoming more popular across the board, with roughly 30% of European ETF assets invested in these eight popular equity indices. The ascent of ETFs is especially evident for composite indices that have mutli-country and multi-currency constituents, such as MSCI World and MSCI Europe. In this section of the market, ETFs register AUM growth rates of 3.3x and 2.4x respectively, a rate that is well over double that of the rest of the ETF market.
Why are the rules of the beta investing game changing?
A rapidly changing beta investment market has brought with it a renewed necessity to understand product related characteristics and how they apply for each investor’s circumstances. Product functionality, instrument investment [performance] considerations, liquidity evaluation, investment holding costs and dividend considerations are just a few of the relevant factors that can often drive an investor’s ultimate decision.
Futures and total return swaps are classified as derivatives, while ETFs are fully funded equity instruments. In a period of increased vigilance and risk surveillance, ETFs have gained ground, especially with more conservative and medium sized investors such as pension funds and high net worth managers. Futures and total return swaps still remain very popular with larger and more [feature specific] demanding investors. Both futures and ETFs are standardised instruments, while total return swaps offer the opportunity for customisation, and that is something that can be very valuable to institutional investors with long term fixed investment mandates.
The meteoric growth of the ETF market has brought with it an increase in the number of available products and benchmarks tracked. In Europe, product count has tripled over the past three years (from 447 in 2007 to 1,206 currently), and this has afforded investors with more choice. As a result, investors can often achieve more precise matching of their investment objectives. For example, investors seeking to replicate the MSCI World in the past would routinely use multiple futures to construct the desired investment exposure. With the advent of ETFs, tracking error can often dramatically be lowered by choosing a single ETF.
When looking at absolute investment cost [total expense ratio (TER) for ETFs versus trading, clearing and roll costs for futures], ETFs are on average more expensive. Average major equity index ETF TERs range between 30-50 bps while futures related costs can be up to three times lower, or even generate positive roll returns depending on prevailing market conditions. However, investors seem to be indifferent as TER levels are known in advance whereas future spreads and roll costs are an unknown until they actually occur.
Besides certainty, there are a few other reasons for the generally higher absolute costs relating to ETFs. First, investment management tasks are outsourced through an ETF. An investor does not need to worry about posting margin, exchanging cash flows and reviewing documentation (more relevant for total return swaps). Second, the ETF investment manager will optimize the fund as well as continuously monitor and rebalance the fund portfolio. In addition, they will also perform any other necessary tasks to ensure a fund meets its investment objectives.
As part of the investment management mandate, an ETF manager will also engage in ancillary activities, as permitted by the fund’s prospectus and investment guidelines, in order to generate income that can help offset fees and other expenses, thus bringing the ETF’s return closer to that of its benchmark index. Such activities can include optimization of dividend tax paid as well as engaging in security lending activities. On certain occasions dividend relief can off-set the average 30% dividend tax and securities lending may boost an ETF’s performance by 100 bps.
Lastly, dividends, and how they are priced into a beta instrument as well as their seasonality pattern, can play a big role in an investor’s choice. ETFs in their large majority target total return indices and as a result, accumulate dividends. Certain ETFs will distribute those back to their shareholders while others will automatically reinvest them. Futures valuations will reflect both known and expected relevant dividend information, however, changes in dividend expectations may impact the roll cost associated with a futures contract. There is no magic bullet which dictates use of ETFs as more preferable than futures or vice versa, instrument. Dividend related features should be clearly understood and a decision should be made based on the circumstances and investment objectives pertaining to each investor.
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Source: DB Global Equity Index & ETF Research
ETF Landscape: STOXX Europe 600 Sector ETF Net Flows, week ending 20-Aug-10
August 25, 2010--Last week saw US$188.5 Mn net outflows from STOXX Europe 600 sector ETFs. The largest sector ETF outflows last week were in Banks with US$90.5 Mn and Food & Beverage with US$76.6 Mn while Basic Resources experienced net inflows of US$29.5 Mn.
Year-to-date, STOXX Europe 600 sector ETFs have seen US$223.8 Mn net outflows. Food & Beverage sector ETFs have seen the largest net outflows with US$152.0 Mn, followed by Basic Resources with US$142.4 Mn while Media has experienced the largest net inflows with US$212.7 Mn YTD.
The US$8.2 Bn AUM invested in the ETFs is greater than the US$3.6 Bn open interest in the sector futures. The ETF AUM is greater than the open interest in each of the corresponding futures contract in all 19 sectors.
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Source: Global ETF Research & Implementation Strategy Team, BlackRock
NYSE Liffe launches new weekly options on single stocks
Broadening range of short term individual equity options after successful European launch
August 25, 2010--As from September 3 NYSE Liffe will introduce three new weekly options on high profile blue-chip shares: Aegon, KPN and Philips. After the successful launch of weekly options on ING Group, Royal Dutch Shell and ArcelorMittal in July, NYSE Liffe is now extending its offering of these unique products in Europe.
The key attraction of weekly options is that they cost less to trade than longer-dated alternatives. Generally the premium payable on short-lived weekly options is lower because its time value element is smaller. For the same reason they also offer greater leverage: even a small price movement in the individual shares can generate an attractive return. Therefore weekly options can benefit from the volatility of an individual share with short-term trading strategies.
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Source: NYSE Euronext
Danske Bank And NASDAQ OMX Launch New Covered Warrants In Finland
August 25, 2010--NASDAQ OMX Helsinki today started trading sixty new covered warrants issued by Danske Bank. The new range of covered warrants tracks various shares included in the OMX Helsinki 25 index.
“We consider it important that as a part of international Danske Bank Group we are able to offer our clients new capital market products. We believe that domestic clients benefit from the fact that the financial service provider is a well established counterparty that operates in Finland and is able to give service also in the domestic languages”, says Jukkapekka Laurila, Head of Danske Markets Equities Finland.
“Covered warrants can be used for trading and investment purposes as well as for hedging one's equity portfolio. By issuing covered warrants in Finnish Blue Chips we enable investors to utilize the price movements that mirror the market movements of the most liquid shares in OMX Helsinki index. We will now be issuing turbowarrants and warrants, followed by index certificates in the future. With these products investors are able to take advantage of medium term investment trends as well as the short term trading opportunities with smaller amounts of capital. However, investors must note that these products involve greater risks than direct investments in equities or indices”, says Maj van Dijk, Head of Derivates in Danske Markets Equities Finland.
Lauri Rosendahl, President of NASDAQ OMX Helsinki said: “The entry of Danske Bank into the Finnish covered warrant market will further broaden the choice of products available to Finnish investors. We are pleased to welcome Danske Bank.”
For more information about the covered warrants now issued by Danske Bank, please visit www.sampopankki.fi
Source: NASDAQ OMX
FESE response to CESR Consultation Paper on standardisation and exchange trading of OTC Derivatives
August 25, 2010--FESE believes that standardisation is desirable and that all products that can be standardised should be standardised: where appropriate, and to the maximum extent possible, OTC derivatives should benefit from legal, process and product standardisation in order to significantly reduce operational risk, facilitate clearing and facilitate reporting of regulatory information to supervisors.
On the other hand, it will be key to preserve the ability of nonfinancial users to hedge against risk using the instruments they consider appropriate. With regard to CESR’s assessment of the benefits and limitations of exchange trading of OTC derivatives, FESE broadly agrees with CESR’s analysis – in particular, we believe that benefits highlighted by CESR are particularly relevant for standardised/eligible OTC derivatives and more generally for derivatives eligible for CCP clearing traded on exchange.
view the FESE Response CESR CP Standardisation and Exchange Trading
Source: FESE
FESE Response to CESR Consultation Paper on Transaction Reporting
August 25, 2010--ESE members sympathise with the solution proposed by CESR to define a new position reporting regime through trade repositories and allow MiFID transaction reporting through trade repositories. Moreover, we particularly welcome CESR’s suggestion concerning the possibility for investment firms to comply with MiFID provisions to report transactions by relying on TRs or CCPs.
view FESE response_CESR CP_Transaction Reporting
Source: FESE
Ireland stung by Standard & Poor’s credit rating cut
August 25, 2010--Ireland’s government faced mounting pressure on Wednesday to put a final price on bailing out its banks after a credit rating cut from Standard & Poor’s pushed its borrowing costs higher.
After winning plaudits for moving quickly to tackle its deficit, Ireland is once again at the center of European debt fears with investors demanding a whopping 340 basis point premium to hold Irish 10-year debt over German Bunds, the highest level since the Greek financial crisis gripped in May. S&P cut Ireland’s long-term rating by one notch to ‘AA-’ on fears of a substantially higher bill for supporting the banking sector and assigned a negative outlook, meaning another cut is more likely than not over the next one or two years. Dublin hit back, saying S&P’s analysis was “flawed.”
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Source: Todays Zaman
Spanish plan for rival to BME
August 24, 2010--A group of Spaniards from the finance sector on Tuesday announced plans to launch the country’s first alternative trading platform for securities, to compete against the near-monopoly of Bolsas y Mercados Españoles (BME).
Called Pave – for Plataforma Alternativa de Valores Españoles – the project is still in its early stages, but those launching it said they had the support of two unnamed financial institutions in London and one in Spain.
Brokers, bankers and analysts contacted by the Financial Times said they were not aware of its existence. Pave said that further details would be released in October and that the plan was for the Barcelona-based operation to start functioning in the first quarter of next year.
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Source: FT.com
STOXX Changes Composition Of Benchmark Indices - Results Of The Third Regular Quarterly Review To Be Effective On September 20, 2010
August 24, 2010--STOXX Limited, a global index provider and creator of the
leading European equity indices, today announced the new composition of the STOXX Global 1800 Index, STOXX Europe Total Market Index, STOXX Europe 600 Index, STOXX Americas 600 Index, STOXX Asia/Pacific 600 Index, STOXX EU Enlarged Total Market Index, STOXX
Eastern Europe Total Market Index, STOXX Eastern Europe 300 Index and their sub- and sector indices, as well as that of the STOXX Europe Football Index and STOXX Europe Private
Equity 20 Index
Effective as of the open of European markets on September 20, 2010, the following stocks will be added to and deleted from the STOXX Europe 600 Index and its respective size
and sector indices:
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Source: STOXX
Eurex to Launch Options on Six Lyxor ETFs
New listings to expand successful ETF derivatives segment
August 24, 2010--Eurex, the international derivatives exchange, announced today that it will list six new options based on the Lyxor ETFs on the indices DJ Russia Titans, DJ Turkey Titans, Hang Seng China Enterprise Index (HSCEI), Hang Seng Index (HSI), CECE Eastern Europe (CECE EUR) and MSCI Emerging Markets. Launch date will be 20 September 2010. Since the launch of the ETF options product suite in May 2010, more than 70,000 contracts have been traded.
"By adding six more ETF derivatives covering emerging markets, we support the expansion of the ETF market by offering hedging opportunities for investors and ETF issuers. Right now, we offer 13 options and three futures on ETFs”, said Peter Reitz, member of the Eurex Executive Board. “Interest and trading activities in ETF derivatives have seen steady growth since our launch a few months ago.”
“Lyxor as the leading provider in emerging markets ETFs is committed to providing clients with the safest and most liquid tools to implement their strategies. Listed options represent the most natural complement to this goal, allowing yield-enhancement and leverage strategies in a very simple and transparent way, accessible to an ever wider array of investors”, added Alain Dubois, Chairman of the Board of Lyxor AM.
Lyxor is the second largest ETF provider in Europe. With the launch of options on Lyxor ETFs, Eurex now offers options on five ETF issuers, which together stand for approximately 75 percent of the assets under management in ETFs in Europe.
The new ETF options will be traded in euro, physically settled (American-style) and have maturities of up to 24 months. The contract size will be 100 units. Société Générale will act as market maker to support liquidity in the order book.
All six Lyxor ETFs are listed at XTF, Deutsche Börse’s ETF trading segment. Since its launch in April 2000, the XTF segment has established its position as the leading trading venue for exchange-traded funds in Europe, with 680 listed funds and a market share of approximately 38 percent by European ETF turnover.
Source: Eurex
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