process, arising challenges and her personal plans for 2012.
Debbie, in the last months one could read and hear a lot of transparency initiatives started by several ETF issuers. Was this (in some cases) just nice marketing or has the ETF industry already reached a deep and reliable level of transparency?
Daily transparency of the securities in an ETF has been of the Unique Selling Points, or USPs of ETFs since the launch of the first ETF the Toronto 35 Index Participation Units (TIPs) on March 9, 1990 – nearly twenty-two years ago – in Canada on the Toronto Stock Exchange.
Providers of ETFs have been reacting since the financial crisis in 2008 to investors requests for greater transparency by providing details of swap counterparties and collateral for synthetic ETFs and more recently on securities lending activities including the average and maximum amount of securities on loan, collateral levels, composition, frequently-used counterparties and the net returns to the fund for physical ETFs.
While ETFs offer daily transparency on their underlying investments and management processes most other UCITS (Undertakings for Collective Investment in Transferable Securities) funds and other 1940 Act funds in the US provide less frequent information.
Are today’s ETF investors more educated than one year ago – and are their levels of education already sufficient?
The level of knowledge on ETFs is greater today than a year ago – education is ongoing and never-ending process. As with most things people will be on different parts of the learning curve with ETFs. People are using ETFs in many different ways and their level of knowledge will reflect their interest and experience.
The adoption and use of ETFs is happening quickly and globally. Education is need to address many factors: new retail and institutional investors, how the products are being used, how much of a portfolio is allocated to ETFs, where and how they are traded, new providers, and the large number of new ETFs on new benchmarks, the use of derivatives to generate returns, new cross listings, tax and regulatory rules and proposals for change, as well as growth in similar products that are not funds such as ETCs, ETNs, ETVs, ETPs etc.
It is also important to remember that ETFs are a relatively new product in many markets and to many investors. The first ETF was launched in Canada in 1990, in the United States in 1993, in Europe in 2000 and in Asia on 1999. Many financial advisors in Europe and Asia have tended to shun ETFs preferring to use mutual funds, which pay them distribution fees – the majority of ETFs do not pay distribution fees.
“Education is an ongoing and never-ending process”
You met in the last years probably an uncountable number of institutional investors worldwide. Which questions surprised you most? – And which question you have heard most?
I am still asked – why do institutions use ETFs or why do financial advisors use ETFs.
Exchange Traded Funds have become popular and widely used investment vehicles. In a world in which new financial products come and go at the blink of an eye, ETFs might well be considered the leading financial innovation of the last two decades. Since the first fund was launched in the Canada in 1990, ETFs have opened a new panorama of investment opportunities. They have fundamentally changed how both institutional and retail investors construct investment portfolios. Essentially, they are index funds that are listed and traded on exchanges like stocks; they allow investors to gain broad exposure to specific segments of equity markets with relative ease, on a real-time basis, and at a lower cost than many other forms of investing. ETFs are based on sector, large-cap, mid-cap, small cap, value, growth, domestic, international country and regional equity indices, commodity, currencies as well as on corporate, credit, inflation and government fixed-income indices. ETFs typically can be used to short indexes, are lendable, and are purchased on a commission basis just like other equities.
ETFs offer many advantages. We believe that growth in the use of ETFs reflects their many advantages. They trade throughout the day on major securities exchanges and can be bought and sold using market, limit, or stop orders. ETFs are funds, not derivatives, which allow investors to quickly react to short and long-term needs or opportunities. As such, they may serve as an alternative to futures, trading baskets of stocks and traditional mutual funds. ETFs do not have any sales loads, although they do, like mutual funds, have annual expense ratios, albeit less than traditional funds. In fact, ETFs have some of the lowest expense ratios among registered investment products. Recent interest from individual investors has been partially fuelled by attempts to avoid accounting, earnings, and other stock-specific risks.
“We believe that growth in the use of ETFs reflects their many advantages”
ETFs have many investment applications. In our view, broad-based ETFs can serve as diversified core holdings, while style and sector ETFs can be used to complete parts of a portfolio or for tactical strategies. Due to their targeted exposure to specific market segments, we believe ETFs generally work well within the macro asset allocation and sector emphasis models developed by equity strategists. The also help provide efficient ways to gain international diversification. Another benefit of ETFs is that they are complimentary to most other investment products. They can be used together with common stocks, private asset managers, and other fund products.
In the current market turmoil investors are becoming even more concerned about counterparty risk, transparency, liquidity, product structure, cost, the use of derivatives and structured products. As a result, the use of ETFs to implement exposure to cash, fixed income, commodities and equity indices is becoming more popular.
If you look on the spreads of comparable ETFs i.e. on blue-chip indices or leveraged instruments, in some cases the products in Europe have a wider spread than its peers in the US. What are your thoughts on this issue? Might it be an option for an investor to trade most of its ETFs in the US because this is the most liquid market?
ETF spreads [The bid/ask spread is the difference between the best price being offered the “bid” and the best price someone is willing to sell the “ask”.] are based on the liquidity of the underlying stocks in the ETF as well as the trading volume in the ETF. When there are large orders “Authorized Participants” (APs) can create new shares of an ETF by buying the underlying stocks in the index in the right weights and deliver them to the ETF provider. If the ETF is providing exposure to an underlying market that is closed the spread will be wider during non-congruent trading hours.
Another important factor is that under MIFID (Markets in Financial Instruments Directive) ETF trade reporting in Europe is not required. This means that typically only about a third of all ETFs are reported in Europe while two-thirds of ETF trades are done OTC. In the US all ETF trades are required to be reported.
“All though spreads may be tighter in an ETF listed in the US there are other costs and factors to consider.”
All though spreads may be tighter in an ETF listed in the US there are other costs and factors to consider. ETFs in the US are US funds and as such are often not tax efficient for non-US based investors. For non-US-based investors they tend to be hit with two levels of withholding: in the fund, which will impact all investors, as well as being withheld on payments out of the fund (this is not tax advice, nor is it intended to be tax advice).
With focus on Europe: Should investors be concerned if they place its orders not on the (probably most liquid) primary listing venue – i.e. LSE or Frankfurt?
Investors should feel comfortable trading on exchanges across Europe as ETF trading is supported on exchanges where they are listed by market makers who are required to make prices often within a certain spread during market hours and by “Authorized Participants” (APs) who can create new shares of an ETF by buying the underlying stocks in the index in the right weights and deliver them to the ETF provider.
As already mentioned, it is important to remember that under MIFID ETF trade reporting in Europe is not required. Hence only about a third of all ETFs are reported in Europe while two-thirds of ETF trades are done OTC.
The global ETF business remains concentrated in the US with nearly 70% of AUM market share. From which regions of the world you expect the most inflows into ETFs and other passive, index-linked products within this year?
The US is accounts for the majority of AUM but we are seeing growth in many other markets and regions. The CAGR in AUM in Europe, Canada and Asia Pacific over the past five years has been faster than the rate in the US. Many non-US based institutions use the ETFs listed in the US.
ETFs were first introduced in Europe in April 2000. Most ETFs in Europe are UCITS funds, and although these ETFs account for only 3.5% of all UCITS funds, they have been growing at a much faster rate than other UCITS funds (asset growth of 47% p.a. over the past 10 years for ETFs, versus 5% p.a. for other UCITS funds).
Are there some new hot-spots on the global map where new “ETF fans” appear?
Analysis of the use of ETFs listed globally by institutional investors around the world, who have reported in their different filing sources including 13F, 13D and 13G, proxy and other declarable stakes over a 12 year period from 1997 witnessed an increase of 1,547%. This represents a CAGR of 26.29% over that period. There where, 2,717 investment institutions worldwide that reported using one or more ETFs listed on exchanges around the world, these investors were located in forty-one countries. The United States, the United Kingdom, Canada, Spain and Switzerland have the largest number of institutional users and account for 83%. ETFs are gaining widespread popularity with all types of investors all around the world. A trend that will continue.
What are in your opinion the key topics/key challenges for the global ETF industry this year?
Economic, political, regulatory and tax issues are going to be driving forces for ETFs and the investment industry in 2012. There are many elections scheduled for this year including some major ones in the US, France and a leadership change in China. We are likely to see continuing volatility. Many investors implemented risk-off trades in 2011 and are now sitting on a lot of cash. If the economic and political situations and improve investors are likely to deploy money back into the markets via ETFs and other products.
“Many people who discuss active ETFs focus on if their AUM has grown rather than are they delivering alpha. Many users of ETFs are active managers so they will not likely use active ETFs.”
Distribution, product innovation, costs, transparency and education are becoming increasingly important. Many people are and have been for a number of years discussing what they see as the potential for active ETFs. At the end of 2011 there were 67 ETFs with US$ 3.5 billion in AUM or less than 1% of overall ETF assets. Many people who discuss active ETFs focus on if their AUM has grown rather than are they delivering alpha. Most users of ETFs use them as tools for low cost beta exposure. Many users of ETFs are active managers so they will not likely use active ETFs.
Will the growth of the ETF industry continue this year?
Yes, I expect that we will see the ETF industry grow at a rate of 20 – 30 percent in 2012.
There are currently more than 150 ETP worldwide. Is the cake still large enough for new issuer?
According to the latest research figures, at the end of 2011, the global ETF industry had 3,016 ETFs, with 6,787 listings, assets of US$1.35 Trn, from 158 providers on 50 exchanges. It will be difficult for a new entrant to break into the top ranks in the traditional ETF industry providing index exposure, as it is a highly competitive and concentrated industry. The top 3 providers out of the 158 account for 68% of all of the ETF AUM globally and the top 10 managers for 82.1%.
Provider market share
The assets are also highly concentrated in some key products the top 20 ETFs out of 3,016 account for close to a third of the total AUM, the top 10 ETFs account for nearly 60 percent of the average daily trading volume and the top 20 ETFs based on NNA (net new asset flows) account for over a third of total NNA.
“It will be difficult for a new ETF entrant, as it is a highly competitive and concentrated industry.”
Some people started phone calls with you in the past not with “How are you?” but “Where are you?”…
It is true that a number of people would start by asking, “Where are you” – Chris started the trend – which then seemed to become the norm over the past few years. I have enjoyed the chance to meet, educate many people globally on ETFs and their applications as well as learn from people in over 52 countries around the world since I started covering ETFs and OPALS in 1997 when there were only 21 ETFs and US$8 billion in AUM – the SPDR and WEBS.
You visited globally many different places. Which places/cities on earth you like most – and which airport(s) you hate?
I do not particularly like any airport, delays, taking my shoes off, checking bags, and not being able to take a bottle of water with me. I could have skipped some of the experiences – a 6.5 earthquake in Japan and then one in Taiwan, a couple cases of food poisoning.
You still enjoy working within the ETF industry?
Yes, I have and continue to enjoy meeting and working with investors and investment professionals around the world to help them understand and use ETFs and other ETPs to implement asset allocation. Assisting them in comparing them to mutual funds, segregated accounts, commingled funds, futures, swaps and certificates.
It has been great fun and a lot of hard work to write reports on the trends in the ever growing ETF industry, how to implement exposure via ETFs and other delta 1 products, creating handbooks on all ETFs/ETPs highlighting the important criteria, which investors should compare when selecting a product, and working on bespoke client requests.
To most people Debbie Fuhr was in the past a really impressive “One-Woman-Show”…
Oh no, luckily I have always had a great team of people supporting me in these efforts – to name a few who deserve a special thank you – Shane, Matthew, Brad, Louiza, Maria, Anthony, and Rory.
Is there a summary you have in mind with regards to ETFs?
Certainly: Exchange Traded Funds – are one of the greatest and most beneficial financial innovations in the past 25 years for both retail and institutional investors globally. They are funds, which are easy to use, simple, cost efficient, diversified, providing real-time access to many asset classes in a transparent fashion.
What are your personal plans for 2012?
My team and I have had a great journey so far with ETFs but the journey is far from over. We are expecting the future to be even better. The need for education, accurate, comprehensive and timely analysis, reports and bespoke assistance continues to grow due to the growth in every dimension of the ETF industry such as: products, benchmarks, structures and the evolving tax and regulator environment. We plan to leverage our extensive industry experience, unparalleled industry contacts and rigorous analysis to deliver clients with timely, unique and data intensive proprietary research to leading global institutional investors.
Founded in Spring 2009, ETF Radar is a smart, private and independent organization which provides comprehensive market intelligence, news and fundamental research solutions strongly focused on the exchange traded funds business. We are covering the ETF market globally and have launched the first global, high-end exchange traded funds magazine and will introducing new services within the next time in order to refine our value proposition. With our well established flag-ship publication, the ETF Radar Magazine, we strive to inform, inspire and educate investors around the globe. We are open-minded for new ideas and additional value-adding partners for our venture.
Deborah Fuhr currently is providing independent ETF and Delta1 research and strategy. She was previously the Global Head of ETF Research and Implementation Strategy and a Managing Director at BlackRock and Barclays Global Investors from Sept 2008 – Oct 2011. Under her guidance, BlackRock’s Global ETF Research and Implementation Strategy team was responsible for advising clients on the implementation of asset allocation strategies using ETFs, producing analysis and guidebooks on the global ETF industry. The team won a number of awards for their reports. Prior to joining BlackRock in September 2008 she spent the past 11 years working at Morgan Stanley, where she was a Managing Director and head of the Investment Strategies Group at Morgan Stanley based in London. In 2007, 2008 and 2009, Deborah was named as one of the Top 100 women in Finance, a distinguished list of the most influential women in European Finance, by Financial News and in 2010 was featured in Investors Chronicle’s list of “150 People That Can Make You Money”. She has an MBA from the JL Kellogg Graduate School of Management, Northwestern University, and Bachelor of Science from the University of Connecticut.
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