ThinkETFs (Think) became the first Dutch provider of exchange-traded funds (ETFs) when it was launched in 2009. Nine years on, the company, which started of independently but has been a 60% BinckBank-owned subsidiary since 2010, is now in the process of on-boarding VanEck, a global asset manager headquartered in New York. The US ETF provider signed a share purchase agreement in January to acquire a majority stake in Think, with the firms senior management retaining a small interest themselves.

In part one of a two-part interview, Martijn Rozemuller (pictured), managing director and co-founder of Think, talks to SRP about how the journey started, the problem with dividend tax, physical replication, and why now is the time to expand into Europe.

"Think is quite a special company due to the fact that we started off as a completely independent firm," said Rozemuller. "If you look at the list of ETF issuers that exists in Europe, very few, if any, were established independently. Most ETF providers started out as part of a bank or insurer, or at least as part of a larger financial institution."

Rozemuller and Gijs Koning (co-founder and co-managing director), both have a background in high frequency trading. The pair gained their knowledge of financial markets and financial products whilst working at Optiver, a well-known Dutch trading house. "That's probably why, as private investors, we were a little more critical than the average retail investor," said Rozemuller. "With our personal investments we were mainly looking at ETFs and one of the things that struck us was that when, as a Dutch investor, you invest in shares from the AEX, usually you have the option to reclaim dividend tax. However, if you had invested in the same AEX via a foreign ETF, you did not have that possibility. We called that dividend leakage."

That is where the idea came from to set up an ETF provider that would solve that particular problem, according to Rozemuller. "By establishing ETFs in the Netherlands, instead of Ireland or Luxembourg, we were able to use the tax treaties the Netherlands has with hundreds of different countries which allowed us to create more efficient ETFs than other providers," said Rozemuller. "ETFs have already an advantage when you compare them to actively managed funds. The costs are much lower. The spread is good. You simply follow the market in the knowledge that many actively managed funds underperform compared to the market. ETFs are just a really good product."

However, Rozemuller gradually found out that there was also a disadvantage to the background he had. "High frequency trading is basically just trading for your own account," said Rozemuller. "We did not know much about distribution, marketing and sales. For example, we didn't know that in the Netherlands, and in many other countries, you had to pay for distributing a product.

"Nowadays you have the retail distribution review (RDR) in the UK and in the Netherlands there is also a commission ban, but when we started that wasn't the case and investment products were generally sold with a kickback," he said. "That was a bit of a wake-up call for us. You can make great products but that doesn't mean they automatically sell. That proved difficult, especially through the banks."

In the end, although starting out independently, Think became part of BinckBank, an online broker with a banking license, and currently the company has 14 ETFs on offer - all of which are Ucits compliant - with assets under management of approximately €1.6bn.

"Because we love simplicity, all our ETFs follow the index via physical replication, which, in many cases, is by far the easiest and brings the least additional risks," said Rozemuller. "The default for us is physical. Once you cannot replicate physically, which applies to certain commodities for example, the only alternative is synthetic."

Synthetic replication is on the decline in Europe, especially compared to the period 2008 to 2010, according to Rozemuller. "In those days synthetic ETFs were used as some kind of funding for financial institutions. That is no longer so necessary nowadays," he said adding that customers have become more aware of the fact that with a synthetic product there always is a certain counterparty risk attached. "The swap construction that lies behind those products involves a certain legal counterparty risk and that counterparty risk can very well be mitigated with collateral, but as you know, the old Dutch saying is 'better safe than sorry'.

"We actually go one step further," said Rozemuller. "All our ETFs own the underlying securities and we do not lend securities. That way too we prevent that there is any counterparty risk in the fund. I think we are one of the few providers that can really claim that we are only passing the underlying market risk to the end investor, without introducing any form of product or structural risk," said Rozemuller. "We do everything to keep it as simple as possible because we think that works the best."

Not much will change for the time being now that VanEck has acquired the vast majority of shares of Think, according to Rozemuller. "Certainly not in the Dutch situation, but we do get the opportunity to expand further into Europe," said Rozemuller. "VanEck has the ambition to gain market share in Europe and we are part of that strategic plan."

Now that Think has a track record of almost 10-years, "the time has come for us to become more active in other markets", according to Rozemuller. "It is a good fit, both for VanEck and for us, and if anything is going to change it will be a positive change," said Rozemuller who fully expects Think to go and offer more ETFs in the not too distant future.

"We have 14 ETFs and VanEck has now registered nine ETFs in Europe. Combined we now have 23 ETFs and the beauty is that there is actually no overlap between our ETFs and those ETFs VanEck already had. They are fully complementary and we will continue to monitor that in the future so that we do not have duplications."

There is certainly room for expansion, and the firm is seeking to diversify the offering, according to Rozemuller. "We [are] not looking to issue 60th ETF on the Eurostoxx 50 because there are already 59 of them, but we really try to come up with a solution that deviates, something that is not available yet and which also has an added value for the potential investors, either because there was simply no exposure, or because we can do it cheaper, or with a better structure," he said. "In any case, a product that has a right to exist."

Related stories:
Societe Generale launches second generation turbos in the Netherlands

Dutch fund manager partners with BNP to build on solid stocks

Bonus and capped bonus certificates dominate Dutch market as volatility increases