The Most Innovative and Successful ETPs of 2010

Last year saw the launch of 327 new exchange-traded products and there is little doubt that new and innovative ETPs will continue to flood the market this year

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2010 was a buoyant year for the European exchange-traded products (ETPs) industry in many respects, but especially on the product development front. A staggering 327 new products were brought to market, a 26% increase from a year earlier, highlighting frantic competition between providers to capture market shares. Not only did we see numerous “me-too” products aimed at competing with existing offerings mainly on the basis of cost, but also remarkable innovation. A flurry of new products was created to respond to investors’ ever-increasing demand for access to new asset classes and investment strategies. Below we have summarised the most innovative and most successful launches of 2010 by asset class.

Equity ETPs
The past twelve months saw an explosion of new equity products. About 140 new equity ETPs began trading over the last year, representing nearly 42% of all ETP launches. Topping the list was the CS ETF on MSCI EMU (CSEMU) issued by Credit Suisse last January. The fund, which offers exposure to eurozone large-cap equities, today boasts EUR 444 million of assets under management (AuM).

As investors are increasingly seeking to gain more targeted exposures, we saw further slicing and dicing of the equity market with the proliferation of sector-specific and country-specific ETFs in both the developed and emerging world. A slew of ETFs tracking the performance of MSCI World sector indices appeared, including those from Lyxor and db x-trackers, along with a host of equity ETFs offering access to single emerging countries like Russia, India, Chile and Peru. The most successful ETF in that category was the CS ETF (IE) on MSCI India B (CSIN), having gathered almost EUR 80 million of AuM since its inception last August.

Unarguably, emerging markets were one of the hottest asset classes last year as investors’ concerns over high unemployment and mounting budget deficits in developed economies intensified. Twenty eight new products offering exposure to emerging markets hit the market in 2010; the Source MSCI Emerging Markets ETF (MXFS) being the most popular new issue of them all, having amassed AuM of over EUR 256 million since its launch last April.

Encouraging returns in the small- and mid-cap space also led to the issuance of a handful of ETFs tracking pan-European and single country small- and mid-cap indices. The largest ETF in that category was the Amundi ETF Euro STOXX Small Cap (ESM), which drew EUR 72 million over its first six months of existence.

A few unordinary thematic equity ETFs sprouted too, including the world’s first Christian-oriented ETF (XS71) recently introduced by db x-trackers, which physically tracks the STOXX Europe Christian Index.

Commodity ETPs
Commodities were another bright spot in 2010, prompting providers to bring 75 additional commodities ETPs to the market. Gold remained one the biggest stories as investor appetite for the yellow metal as a safe heaven and an inflation hedge seems insatiable. In fact, three of the ten biggest ETPs launched last year are based on gold, the most popular being the db Physical Gold Euro Hedged ETC (XAD1) with over EUR 286 million in AuM.

Other precious metals such as silver, platinum and palladium also garnered much interest from issuers wanting to offer alternatives to investors, especially to those who are worried that gold may be in a bubble. JB Physical Silver Fund A (CHF) (JBSICA) gained the most traction in that category accumulating nearly EUR 83 million in AuM.

In late 2010, ETF Securities grabbed headlines following the launch on the London Stock Exchange of the world’s first physically-backed industrial metal ETCs. The rationale behind investing in hard assets such as copper, nickel and tin is often the same as that of other metals. Investors are increasingly looking at ways to hedge against growing concerns about sovereign risk, currency debasement and potential inflation. But more often, investors in industrial metals are looking for ways to play industrial growth in China and other emerging market economies (for more on this topic please see our article Much Ado About Copper).

Fixed Income ETFs
European providers added 31 new fixed income ETFs to their product line-ups last year as investors became more comfortable with the idea of achieving bond exposure through ETFs. However, it is worth noting that there were far fewer launches in the fixed income space than in other asset classes, partly because of investors’ growing appetite for higher-yielding or otherwise riskier assets in a record low interest-rates environment. The eurozone debt crisis also eroded investor confidence in the bond market.

Against this backdrop, funds like the iShares Markit iBoxx Euro High Yield ETF (IHYG) and the db x-trackers II iBoxx Euro Germany 1-3 ETF (D5BC) have proved the most popular. The former, which offers exposure to non-investment grade rated European corporate bonds, has attracted about EUR 353 million of assets since its inception in September 2010, while the latter, which gives exposure to the short-term German government sovereign Euro debt market, boasts more than EUR 118 million of AuM.

Currency ETPs
Innovation also hit the currency corner of the ETP market with the introduction of 54 new products, all of which were issued by ETF Securities. Unsurprisingly, its Long USD Short EUR (DE) ETC (XBJP) topped the list with assets of EUR 42 million.

ETF Securities also recently issued a suite of triple-leveraged currency ETCs, which allow investors to hedge their currency exposure without tying up too much capital. They can also be useful to capture market trends. However, because of the level of risk associated with this type of leveraged products, we will never tire of saying that they are suitable only for sophisticated investors who understand the effects of the daily resetting of leverage on long-term returns.

Hedge Fund ETFs
Following db x-trackers’ success in the hedge fund ETF space, Marshall Wace, Source, UBS and Goldman Sachs took the plunge last year each launching their own hedge fund ETFs. Source and Goldman Sachs ETFs are so-called hedge fund replicators, i.e. they mimic hedge fund investment strategies. Marshall Wace’s ETF invests in equity on the basis of investment ideas from third parties, and UBS delivers the performance of the HFRX Global Hedge Fund EUR Index through a swap-based strategy. They have all in their own ways managed to mitigate some key issues inherent in this type of investment, including lack of liquidity and limited transparency.

Innovation Will Continue
While 2010 was a record year from a product development standpoint, there is little doubt that new and innovative ETPs will continue to flood the market this year. Whether or not they will all be worth investing in and lure enough money to be profitable for their issuers is another matter. ETP closures have become commonplace in the US in recent years and Europe might follow this trend. Last year, EasyETF liquidated 15 equity sector and thematic ETFs due to a lack of investor interest. We will certainly keep an eye on how this trend evolves.

Meanwhile, new players are expected to join the fray. PIMCO has recently announced a partnership with Source to launch a series of fixed income ETFs, some of which will be actively managed. Natixis-backed Ossiam also plans to introduce a diverse range of specialty ETFs based on quantitative and fundamental methodologies. We wouldn’t be surprised to see more of these partnerships flourish this year.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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