Evolution of ETFs. Tim Huver European ETF Product Manager. 14 November For institutional investors only. Not for public distribution.

Transcription

1 Evolution of ETFs Tim Huver European ETF Product Manager 14 November 2012 For institutional investors only. Not for public distribution.

2 Agenda The global ETP marketplace Indexing adoption accelerates Fee and regulatory (r)evolution European ETF usage trends Trading evolution 2

3 Global ETP marketplace Assets (US$ billions) $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $ US-listed AUM = $1.06 trillion Global ex-us AUM = $471 billion Global AUM = $1.53 trillion 3,500 3,000 2,500 2,000 1,500 1, Number of ETPs $ Left axis Right axis US-listed ETP assets Number of US-listed ETPs Worldwide ETP assets ex-us Number of Worldwide ETPs ex-us 0 Source: Illustration by The Vanguard Group, Inc. using data from Bloomberg LP. 3

4 ETPs and indexing, moving in tandem (flows) Active and passive fund flows Fund cash flows (US$ billions) % 74% 80% 61% 72% 70% 62% 92% 78% 62% 100% 95% 66% 77% 46% ETFs as percentage of passive June 2012 US active fund flows US passive fund flows Global ex-us active fund flows Global ex-us passive fund flows Europe active fund flows Europe passive fund flows Source: Illustration by The Vanguard Group, Inc. using data as at 30 June 2012 from Morningstar, Inc. 4

5 ETPs and indexing, moving in tandem (AUM) Total fund assets under management June 2012 US active 86.9% 84.6% 82.0% 80.8% 79.9% US passive 13.1% 15.4% 18.0% 19.2% 20.1% Global ex-us active 94.2% 93.1% 92.9% 92.7% 91.3% Global ex-us passive 5.8% 6.9% 7.1% 7.3% 8.7% European assets under management Europe active 93.5% 92.3% 91.6% 91.5% 91.3% Europe passive 6.5% 7.7% 8.4% 8.5% 8.7% Source: Illustration by The Vanguard Group, Inc. using data from Morningstar, Inc 5

6 European ETP marketplace continues to fuel growth globally $350 6,000 $300 $250 $200 $150 $100 $50 5,000 4,000 3,000 2,000 1,000 $ Left axis Assets (US$ billions) Right axis Number of ETPs Number of listings Source: Illustration by The Vanguard Group, Inc. using data as at 30 June 2012 from Morningstar, Inc and Bloomberg LP. 6

7 However, this growth also means many European ETFs are at risk of closing Products in at-risk range US$100,000 Assets (US$ millions) $10,000 $1,000 $100 $10 ETFs that failed to capture US$30 million AUM in 3 years 50.0% closed ETFs (61/122*) 36.3% open ETFs (617/1,701**) $ Tenure (years) Open Closed Source: Illustration by The Vanguard Group, Inc. using data as at 30 June 2012 from Morningstar, Inc. *Total of 152 closed; assets not available for 30 ETFs. **Total of 1,935 OPEN; assets not available for 234 ETFs. 7

8 Synthetic products dominate the European landscape but are far less adopted elsewhere Proportion synthetic 80% 70% 60% 50% 40% 30% 20% 10% 0% June Europe Global ex-europe Source: Illustration by The Vanguard Group, Inc. using data from Morningstar, Inc. 8

9 While both synthetic and physical backed ETFs continue to capture cashflow European cash flow by structure $80 $60 $40 $20 $0 -$ June Physical Synthetic Source: Illustration by The Vanguard Group, Inc. using data from Morningstar, Inc. 9

10 European investors have a strong preference toward physical ETFs over synthetic Investor preferences 100% 80% 60% 40% 20% 0% Physical Replication Synthetic Optimisation Source: Analysis by The Vanguard Group, Inc. using data as at 31 December 2011 from EDHEC-Risk Institute. 10

11 A fee and regulatory (r)evolution European fund industry gears up for raft of new rules Source: Illustration by The Vanguard Group, Inc. 11

12 Where the revolution started Percentage of fee-based compensation in the US 39% 44% 50% 55% 54% 57% 55% 18% 20% 26% 28% 31% 33% 10% < Source: Illustration by The Vanguard Group, Inc. using data as at 31 December 2011 from Financial Research Corporation, Securities Industry and Financial Markets Association, and Cerulli. 12

13 Where the revolution s started going? Percentage of fee-based compensation around the world 55% 25% 16% 10% US Australia Canada UK Source: Illustration by The Vanguard Group, Inc. using data as at 31 December 2011 from The Vanguard Group, Inc. and Cerulli. 13

14 Pattern of channel uptake It starts with institutions ETF market penetration (by channel) Global ex-us market today Europe and Asia US and Canadian market today Direct Adviser Institutional Less sophisticated individual investors as final adopters. Education and institutional adoption lead to recognition of ETFs benefits as low-cost diversification tool. More sophisticated early adopters create liquidity, reduce spreads, make ETFs more broadly attractive. Time Illustrative (not drawn to scale). Source: Analysis by The Vanguard Group, Inc. using data as at 31 December 2011 from The Vanguard Group, Inc., Bain & Co. and Investor Economics. 14

15 Pattern of channel uptake From institutions to advisers Institutional Adviser Direct US 50% 45% 5% Canada 37% 34% 28% UK 90% 9% 1% Continental Europe 85% 10% 5% Asia 90% 9% 1% Australia 10% 30% 60% Source: Analysis by The Vanguard Group, Inc. using data as at 31 December 2011 from The Vanguard Group, Inc., Bain & Co. and Investor Economics. 15

16 European institutional product preferences ETFs Futures TRS Index funds Liquidity % % % % Cost of liquidity % % % % Other cost % % % % Tracking error % % % % Product range % % % % Transparency % % % % Minimum subscription % % % % Operational constraints % % % % Regulatory regime % % % % Tax regime % % % % Control of counterparty risk % % % % Average % % % % Rating Familiarity Source: Analysis by The Vanguard Group, Inc. using 2011 data from EDHEC-Risk Institute 16

17 Product usage questions and considerations Investor preferences determine the implementation strategy Cost What are all the associated acquisition and maintenance costs of the position, including expense ratios, bid/ask spreads, brokerage commissions, borrowing costs? How do these costs impact excess returns? Tracking error What unique factors could cause tracking error? Funds and ETFs depend mostly on level of replication/optimisation, futures have basis risk and contango/backwardation, swaps can have changing terms/costs of the swap. Liquidity How important is the level of liquidity? Funds have great end of day liquidity, futures and ETFs have varying intraday liquidity (can be very good or not very good), swaps are dependent on relationships and dealer capacity. Counterparty risk To what extent does it exist? On-exchange futures are guaranteed by clearinghouse, swaps can be collateralised, physical ETFs and funds are largely settlement-based (sec lending can be collateralized). Capital requirements What level of capital is required to establish and maintain the position? For example, ETFs and funds require 100% capital (unless a margin position), futures require less than 100% capital (but have initial margin and maintenance margin), swaps could have some level of required collateral up front and/or ongoing to reset exposures. 17

18 European institutions use of ETFs expected to continue increasing Increase Stay the same Decrease ETFs Futures TRSs Index funds 0% 50% 100% 0% 50% 100% 0% 50% 100% Source: For Illustration institutional by use The only. Vanguard Not for Group, distribution Inc. using to retail data investors. from EDHEC-Risk Institute. 18

19 European usage trends Investment purpose Broad market exposure Long-term/buy-and-hold investment Short-term/dynamic investment Specific sub-segment exposure (sector, style) Tactical bets Management of cash flows (e.g., cash equitisation) Dynamic portfolio insurance strategies (e.g., CPPI) Neutralisation of factor exposures of other investments Access to tax advantage Arbitrage transactions to benefit from mispricing of other assets relative to the ETF 0% 20% 40% 60% 80% 100% Frequently Rarely Source: Illustration by The Vanguard Group, Inc. using 2011 data from EDHEC-Risk Institute. 19

20 European usage trends Market access Commodities Real estate Sectors Infrastructure Corporate bonds Volatilities Equities Government bonds Money market funds Currencies Hedge funds SRI 12.7% 33.5% 32.2% 32.1% 28.3% 28.2% 26.3% 24.6% 22.2% 19.7% 44.6% 47.1% 0% 10% 20% 30% 40% 50% Source: Illustration by The Vanguard Group, Inc. using 2011 data from EDHEC-Risk Institute. 20

21 US ETF usage trends Institutional funds vs. Asset managers Transitions Rebalancing Tactical adjustments Cash equitisation/interim beta Portfolio completion ETF overlay/liquidity sleeve Core/satellite Hedging Other 0% 10% 20% 30% 40% 50% 60% 70% 80% Institutional funds Asset Managers Note: Based on responses from 62 institutional funds and 18 asset managers in Source: Illustration by The Vanguard Group, Inc. using data from 2012 U.S. Exchange-Traded Funds Study by Greenwich Associates, LLC. 21

22 US ETF usage trends Institutional funds Transitions Rebalancing Tactical adjustments Cash equitization/interim beta Portfolio completion ETF overlay/liquidity sleeve Core/satellite Hedging Other 0% 10% 20% 30% 40% 50% 60% 70% 80% Note: Based on responses from 62 institutional funds in Source: Illustration by The Vanguard Group, Inc. using data from 2012 U.S. Exchange-Traded Funds Study by Greenwich Associates, LLC. 22

23 Typical ETF Holding Period for US Institutions Asset managers Institutional funds Less than 1 month 28% 41% 7% 12% 1 to 6 months 22% 41% 24% 7 to 12 months 0% 17% 19% 26% Less than 1 to 2 years 11% 6% 15% More than 2 years 12% 22% 21% 36% 0% 25% 50% 0% 25% 50% Note: May not total 100% due to rounding. Based on responses from 62 institutional funds and 18 asset managers in Source: Illustration by The Vanguard Group, Inc. using data from 2012 U.S. Exchange-Traded Funds Study by Greenwich Associates, LLC. 23

24 ETPs get the blame Flash Crash 6 May 2010 ETFs blamed as 60% of securities with cancelled trades were ETFs Rogue trading scandals at Société Generale and UBS ETF Delta One desks involved, raising questions about ETFs Manipulated the custom settlement structure in Europe Falsified backdated settlement ETF trades booked against exposed futures bets Other ways ETPs have been pulled into debates: Counterparty risk with swap-based and physical ETFs Market volatility blamed on ETFs End-of-day rebalancing on leveraged ETFs Large ETF trades impacting trade in underlying baskets Questions about whether an ETF can collapse due to short interest and failure to deliver Premium/discounts on some ETFs owing to creation limitations 24

25 An ever-changing regulatory environment To centralise markets, improve trade execution Reg NMS MiFID and MiFID II On market making compensation Direct payment Indirect payment To strengthen investor confidence Regulation SHO short-selling rules Circuit breakers, limit up/down after 2010 Flash Crash High-frequency traders under scrutiny 25

26 The changing face of market making 2005 Larger banks and brokers Floor specialist Managed flow into specific ETFs ETF arbitrage 2012 Boutique proprietary trading and hedge funds Upstairs traders with strong quantitative and programming skills High-frequency trading Complex portfolio risk management of a trading book of ETFs and hedges 26

27 What lies ahead? Exchanges innovate globally Ability for continuous trading around the globe (passing the book) Exchanges grow global footprint through consolidation Will new players emerge? (Singapore goal to be lead market in Pan-Asia) Regulatory changes Volcker Rule impact on proprietary bank trading and liquidity MiFID II ability to consolidate liquidity and push volume to lit markets New regulations to strengthen financial markets ESMA guidelines on ETFs AIFMD impact on distribution of US ETFs in Europe Market makers Demand for compensation to continue trading certain ETFs Potential impact on high-frequency trading Potential to see more boutique trading firms as regulatory changes impact traders at large brokers 27

28 Disclosures The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information presented does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. The opinions expressed in this presentation are those of individual speakers and may not be representative of Vanguard Investments Switzerland GmbH. Issued by Vanguard Investments Switzerland GmbH, which is authorised and regulated in the UK by the Financial Services Authority Vanguard Investments Switzerland GmbH. All rights reserved. 28