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Business Climate Indicator for the euro area remains broadly unchanged
August 30, 2010--In August, the Business Climate Indicator (BCI) for the euro area remained broadly unchanged after
the jump observed in July. The level of the indicator suggests that economic activity in industry will
continue to recover in the coming months, although it has still some way to go to reach its pre-crisis
level.
Managers in industry were more optimistic about their order books; in particular they were upbeat
about their export order books. Managers' assessment of production observed in recent months and
production and employment expectations remained unchanged. Meanwhile, managers' assessment
of their stocks of finished products worsened slightly.
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Source: Europa
Critics question long-term appeal of ‘Newcits’ funds
August 27, 2010--Even as the growth of ‘Newcits’ funds in the marketplace accelerates, concern has been growing about their limitations and potential dangers.
These fears cover issues such as the potential for investment by retail customers that do not understand the products or for whom they are unsuitable, the possibility that investors may be disappointed if returns fail to match those of offshore hedge funds, and the need for higher volumes of assets under management to meet increased set-up and servicing costs.
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Source: ETF Express
DB Global Equity Index & ETF Research: European Weekly ETP Market Review: Gold slowly re-emerges as downward pressure in the equity markets persists
August 27, 2010--Weekly European ETP Market Roundup
Net Cash flows
Major European equity market indices continued declining the week that finished on August 20th 2010. The Euro Stoxx 50 index fell by 2.3%, the CAC 40-declined by 1.4%, the DAX fell by 1.7% and the FTSE 100 closed the week down 1.5%. Continuing its long rising streak, the price of gold (USD/oz) rose by 1%.
Overall European ETF market flows moderately picked up this week, and while the rise wasn’t dramatic, it has definitely started to show further signs of investors returning to the market. European ETP inflows totaled €598 million (up from the €22 million cash inflow in previous week). ETF trading this week had a taste of the June 2010 patterns. It had a clear direction and it was impacted by declines in the equity markets.
Equity inflows were minimal, netting €174 million across the European ETF industry. Similarly, overall fixed income inflows were weak and totaled €164 million (up from €49 million cash inflow last week). However, commodity flows picked up to their highest levels since the end of June 2010 and totaled €263 million, sharply up from the €28 million of outflow in the previous week.
The level of flows was moderately low this week, and together with the 2.5% decline in average daily turnover, it indicates subdued trading activity. Two themes, albeit mild, left their mark on the week that finished August 20th: (1) uptick of gold inflows, with €255 million of net inflows (vs. €20 million in previous week), (2) Continued overall positive emerging market flows, totaling €160 million. Despite the flow improvement in the past three of weeks, flows remain weak and it will be interesting to see if September will in fact take the market out of its current uneasy quietness. Such a change would officially close the holiday season, or if cautiousness continues it might well prove to be based more on fundamentals.
New Listings
There were two new product launches and one cross-listing last week. Deutsche Bank’s db x-trackers launched two new precious metals ETCs, one tracking the price of platinum and the other tracking the price of palladium Both ETCs are physically backed, their returns are euro hedged and are listed on Deutsche Boerse.
Credit Suisse asset management cross listed an MSCI EMU Mid Cap ETF on Deutsche Borse. This ETF has a primary listing on the Swiss stock exchange.
Turnover
On-exchange total daily average turnover decrease by 2.5% to €1.68 billion, for the week that ended August 20th 2010. Equity turnover registered the largest decline, down by 3.2% to €1.23 billion. Fixed Income turnover remained flat at €203 million and commodity turnover fell by 1.2% to €248 million.
Assets Under Management (AUM)
Total European ETP AUM rose by 0.2% to €198.5 billion, largely driven by commodity prices and inflows. Year to date AUM: are up 18.6%.
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Source: DB Global Equity Index & ETF Research
EU bank regulators overhaul stress tests
Augsut 26, 2010--European bank regulators have overhauled their guidelines on industry stress testing for the first time since 2006, after last month’s tests on 91 European institutions were criticised for not being tough enough.
The European Union’s committee of European banking supervisors, an umbrella body for all the EU’s national regulators, on Thursday published a detailed blueprint of how European lenders should identify and manage risk following a three-month public consultation.
In contrast to July’s one-off examinations of leading European banks, the new guidelines are designed to be applied by regulators day by day.
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Source: FT.com
S&P Expands Range of Risk Control Indices
August 25, 2010--With market volatility remaining, Standard & Poor’s, the world’s leading index provider, today announced that it is extending its range of risk control indices with the launch of two risk control index series. The S&P 500 Dividend Aristocrats Daily Risk Control Index Series and the S&P Nordic LargeCap Daily Risk Control Index Series seek to provide investors greater stability and control over the risk level of the underlying index by establishing a specific volatility target.
The S&P 500 Dividend Aristocrats Daily Risk Control Index Series seeks to provide investors a way to gain exposure to large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years, whilst limiting the level of risk. This is the first such strategy index dedicated to providing exposure to true blue chip companies with managed dividend policies. Risk control levels of 8%, 10%, 12% and 15% are offered.
The S&P Nordic LargeCap Daily Risk Control Index Series seeks to provide large cap investable exposure to the Nordic equity markets, including Denmark, Finland, Norway and Sweden, whilst controlling risk. It utilises the S&P Global Broad Market Index (BMI) and has target volatilities of 10%, 15% and 18%.
Steve Goldin, Vice President of Strategy Indices at S&P Indices, said: “As investor risk appetite returns to the market, the concept of equity investing with associated risk control has grown in appeal. Whilst demand for risk control indices around emerging markets and themes, such as clean energy and infrastructure, remains high, we are seeing an increased interest for risk control on strategy indices and developed equity markets, including Europe, the Nordics and the U.S. The launch of these new indices reaffirms Standard & Poor’s position as the leading independent index provider to offer new levels of innovation for investors looking to control risk.”
S&P’s risk control methodology is a fully flexible risk control solution, which can be applied to any S&P Index. For further information on the S&P 500 Dividend Aristocrats Daily Risk Control Indices and S&P Nordic LargeCap Daily Risk Control Indices, including methodology, please visit www.standardandpoors.com/indices.
Source: Standard & Poor's
Another year of growth and development for the London Stock Exchange markets for Islamic finance
August 27, 2010--In the Islamic Finance Review 2009/10, we explored the key factors contributing
to London’s position as the gateway for Islamic finance in Europe, namely the
depth and breadth of its capital markets, the extensive pool of expertise
offered by one of the largest concentrations of specialist legal and advisory expertise in the world and the sustained commitment from the UK
Government to developing Islamic finance with a series of tax and regulatory changes specifically aimed at facilitating the growth of Shariah-compliant financial products.
We also highlighted the diverse range of products and
offered across the London Stock Exchange’s markets – from the
trading of equity shares on the Alternative Investment Market (AIM), which
offers growing companies all the benefits of being quoted on a world-class
public market within a regulatory environment that has been designed to
meet their specific needs, to the listing of sukuk on the Main Market, an EU
Regulated Market under MiFID, or the Professional Securities Market, which
is Exchange-regulated and offers the benefits of more flexible regulatory
requirements. In addition to this, a vibrant and growing ETF market means
that the London Stock Exchange is able to provide Islamic institutions and
investors with a broad choice of Shariah-compliant financial instruments
within a range of market structures.
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ource: London Stock Exchange
Plus set to relaunch as derivatives exchange
August 25, 2010--Plus Markets has unveiled a plan to turn the small-cap listings and price-reporting platform into a fully fledged stock and derivatives exchange.
The plan, which follows a strategic review that started in March, pits Plus against the London Stock Exchange, Chi-X Europe and other trading venues already competing for business in execution.
Plus said the move would allow it to offer “an innovative exchange venue in London, which brings together primary and secondary market listings, with trading flow from the retail and professional investment communities, across multiple asset classes”.
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Source: FT.com
FSA outlines a fundamental review of trading activity regulation
August 25, 2010--The Financial Services Authority (FSA) has today published a discussion paper (DP) that considers fundamental changes to the regulation of trading activities – one of the key recommendations of the Turner Review following material trading losses incurred during the crisis.
Since the Turner Review was published, the Basel Committee on Banking Supervision (BCBS) has proposed several reforms to the prudential regime for banks and in addition has mandated a fundamental review of trading activities called for in the Turner Review.
The FSA believes that the delivery of a new, robust, long-term, approach to prudential requirements for trading activities is one of the key areas of regulatory reform that must be delivered to build a stronger financial system. The outcome of the BCBS’s fundamental review is central to achieving this objective internationally.
The DP describes the FSA’s current views and ideas in relation to major areas of reform that need to be considered to address areas of structural weakness that exacerbated the build up of risk before the financial crisis.
view the DP10/4: The prudential regime for trading activities - a fundamental review discussion paper
Source: FSA.gov.uk
EU calls for overhaul of UN carbon credit system
August 25, 2010-- The European Union's top climate official called on Wednesday for a major overhaul of the UN's carbon credit mechanism amid concerns from environmental groups.
The Clean Development Mechanism "has been successful in some aspects but has also given rise to criticism, for example, with regard to environmental integrity," European Climate Action Commissioner Connie Hedegaard said.
"As a first step towards a more advanced carbon market the CDM therefore needs a major overhaul," Hedegaard said in a statement.
The commissioner said she would propose new restrictions on the use of credits from industrial gas projects under the EU's emission trading scheme after 2012, the end of its current trading period.
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Source: EUbusiness
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
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