Impact of innovative financial products on financial systems: The case of Exchange Traded Products (global and Polish perspective)

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1 GDAŃSK UNIVERISITY OF TECHNOLOGY FACULTY OF MANAGEMENT AND ECONOMICS Impact of innovative financial products on financial systems: The case of Exchange Traded Products (global and Polish perspective) Adam Marszk, Ph.D., Faculty of Management and Economics, GUT Łódź,

2 Plan of presentation 1. Exchange Traded Funds (ETFs): definition, types. 2. ETFs: benefits and threats. 3. Global ETPs market. 4. ETFs and Polish financial system. 5. Conclusions.

3 Investment funds: selected categories mutual fund investment fund whose manager purchases portfolio of securities and manages it according to the stated financial aim, ready to buy back units at a calculated price (ICI 2013) index fund subcategory of mutual funds, managers aim to track prices of selected stock indexes (IMF 2011) exchange traded fund (ETF) investment fund whose rates of return track results of selected financial assets, usually stock indexes; units (shares) of ETFS are traded on exchanges, through which they can be purchased/sold (Hehn 2005)

4 Investment funds: selected categories ETFs are regarded as substitutes for index funds, due to indentical investment aims index funds are financial products which have been used for decades, whereas ETFs are relatively new (first ETFs in Canada in 1989) over the last 10 years considerable increase in the diversity of ETFs, one of the key innovations synthetic ETFs (based on derivatives) exchange traded products (ETPs) is a wide category of financial products traded on exchanges; apart from ETFs, it includes ETCs, ETNs, ETVs

5 Comparison of ETFs and index funds ETFs: benefits Feature ETFs Index funds Distribution channels Tracking costs Tracking errors Valuation Source: own compilation. Linked with stock exchanges. Very low, mostly stock exchanges transaction costs. Low due to arbitrage transactions. Continuous valuation during trading hours, depends on the supply and demand. Various, including e.g. bank offices, financial advisers. Depend on the management and distribution fees, usually higher than ETFs. Higher than ETFs. Usually once a day by the managing company.

6 ETFs: threats for the financial systems. liquidity risk: disruptions on the ETFs market can be transmitted to the market for the underlying assets disruptions in the ETF arbitrage mechanisms: breakdown of the ETF market increased volatility on commodities markets caused by growing popularity of commodity ETFs (e.g. tracking prices of gold) risk of shock transmission (contagion) between ETFs markets and markets for the tracked assets in various countries lack of transparency of some ETFs

7 Global ETPs market fast growth in assets (AUM assets under management) of ETFs since the beginning of the current century at the end of May, 2015, combined assets of all ETPs listed worldwide exceeded 3 trillion USD main category of ETPs are still ETFs, share of others (ETCs etc.) below 5% of combined assets by regions: largest market in the USA (ca. 70% of all global assets), followed by European, and Asian (mostly Japanese) considerable growth of the European market caused by the launch and development of synthetic ETFs

8 Assets of ETPs May, May 2015 AUM of ETFs (bln USD) AUM of ETPs other than ETFs (bln USD) Source: Author s elaboration based on (ETFGI 2015).

9 Assets of ETPs by region May, May 2015 USA Europe Asia Pacific (ex. Japan) Japan Rest of the world Source: Author s elaboration based on (Deutsche Bank 2015) and (ETFGI 2015).

10 ETFs on the Warsaw Stock Exchange (WSE) first ETF listed on the WSE in 2010 currently 3 ETFs listed on the WSE, all of them managed by Lyxor Asset Management tracked indexes: WIG20 (ETF available only in Warsaw), S&P 500 and DAX in comparison to other developed economies, assets of ETFs in Poland are low, highest level was reached in 2013 ca. 3,6 billion PLN (ca. 1,2 billion USD) assets of the only Polish ETF over the whole period close to 80 million USD

11 Assets of all Exchange Traded Funds listed in Poland (in mln USD) ,15 993, ,60 787,87 84, Source: Author s elaboration based on (WSE 2015).

12 Annual turnover of Exchange Traded Funds shares on the Warsaw Stock Exchange (in mln USD) ,50 70, , ,66 29, Source: Author s elaboration based on (WSE 2015).

13 Shares of tracked indexes in turnover of Exchange Traded Funds units on the Warsaw Stock Exchange between July 2014 and June ,83% 10,62% 61,55% WIG20 S&P 500 DAX Source: Author s elaboration based on (WSE 2015).

14 main group are US-listed fixed income ETFs (at the end of June, 2015, they had Polish sovereign bonds worth more than 750 million USD in their portfolios) ETFs tracking Polish assets sizeable AUM of ETFs listed abroad yet offering rates of return of Polish assets no previous research in this topic significant problem in evaluation of the ETFs impact on the Polish financial system estimates: in 2015 Polish assets of these ETFs were worth more than 1 billion USD; for comparison: assets of the only ETF listed exclusively in Poland were 80 million USD

15 Assets of Exchange Traded Funds tracking Polish assets listed outside Poland (in mln USD). End of June ,0 230,7 36,1 59,4 USA: single country equity USA: emerging markets or sector equity Europe: equity Fixed income Source: Author s elaboration based on reports published by funds providers, and databases on websites:

16 Potential threats for the Polish financial system: preliminary evaluation limited threats resulting from the ETFs listed on the WSE (transmission of shocks through ETFs tracking S&P500 and DAX) more important threats related to the second category, i.e. foreign ETFs tracking Polish assets mostly physical ETFs (low threats linked with synthetic ETFs) limited control executed by the Polish financial authorities (most ETFs listed outside the EU) risk of shock transmission and contagion (decreases in prices, decreases in liquidity or both)

17 Conslusions ETFs market very dynamic: growth in assets, new types of ETFs launched, older ones modified still growing popularity of ETFs caused by e.g. low tracking costs, low tracking errors, high liquidity, ease of investing growth of the ETFs market linked with some risk factors, including threats for the financial system: magnified liquidity downturns and volatility of assets prices, shock transmission, impeded evaluation by the supervision authorities, increased volatility of the commodities markets Polish situation rather unusual: most threats result from ETFs listed abroad Further research necessary.