I have tried calls and puts and even turbos but I have learned my lesson, Think (part2)

In the second of a two-part article, Martijn Rozemuller (pictured), managing director and co-founder of ThinkETFs (Think), talks about the company's client base, the role of the market makers, and his view on structured products.

Ninety to ninety-five percent of Think's customers are from the Netherlands, according to Rozemuller. "We are growing in other countries and we want to put more emphasis on this in the coming years, but of course, we are a Dutch provider and that is reflected in our clients.

"We started of independently, and because of that the institutional market was initially not an option for us," said Rozemuller. "Institutional investors want to see a certain scale, they want to see a track record. It is very difficult as an ETF provider to start at zero and then immediately attract a large customer because that customer is going to say: 'if I invest €10m or €100m in your ETF, then I'm far too dominant'."

Institutional investors do not like that, according to Rozemuller, and, for that reason, Think focused on retail investors, especially at the beginning. "Even now, we still have a relatively large retail customer base," said Rozemuller. "A rough estimate: maybe 2/3 of our assets are retail and 1/3 institutional. You also need that in the beginning as an independent provider, because those big tickets from those big customers do not come if you don't have a track record and no assets."

However, Rozemuller is a firm believer that, as a provider, it can also be a benefit to have a lot of small customers instead of having to rely on one or two large ones. "This is also a story of diversification; the spread that we like to apply in our products to reduce the risk for our customers, we also have the same spread in our customer base to reduce our own business risk."

ETFs can offer so much diversification at such low costs because Think only trades in bulk, according to Rozemuller. "We are the wholesaler," said Rozemuller. "You're looking at minimum amounts of €1m-€2m, which makes it very cost efficient." That means Think never has to deal directly with the investor who may want to buy 10 ETFs worth €400 since the market maker takes care of that, according to Rozemuller. "If you have to operate on that scale, the costs become very high. The big advantage of the market maker or liquidity provider system is that it allows a stock exchange listing, in our case at Euronext, which means you have an open market where the market maker provides bid/offer prices at all times which means investors are almost always able to find a counterparty.

"For some of our products we now have six to seven different market makers and then you see that there is a lot of liquidity," said Rozemuller. There are also products with only three market makers, but even then the bid-offer price does not determine how much liquidity there really is because the size of the ETF can always be increased or reduced, according to Rozemuller. "With ETFs, it is mainly about the liquidity of the underlying shares or bonds. As long as the ETF tracks a very liquid equity or bond index, the ETF itself will be very liquid too."

When it comes to structured products, Dutch investors are known to prefer structures on local shares and indices, and, according to Rozemuller, the same applies to ETFs. "If you look at the turnover on exchange, then our AEX ETF is the most popular," said Rozemuller. "You see that such a familiar name attracts investors. Retail investors in particular use the AEX ETF sometimes to try and beat the market. "They use the ETF as a trading tool," he said. "If the AEX goes down fast, you will see that there is more inflow, which in itself is a good sign because retail investors usually do the opposite.

"Looking purely at the assets under management (AUM), then our Global Equity ETF (AUM of €719m as of May 22) is much larger than the AEX ETF," said Rozemuller. "The turnover on exchange and the number of transactions is smaller, but the total assets of this ETF are much larger. I think it is fair to say that our Global Equity ETF is used more as a buy and hold instrument while our AEX ETF is often used as a trading tool to develop certain ideas about the market."

Rozemuller does not view structured products as competition, but more as an additional product that serves a different purpose. "Investors who are not that experienced should use products that are as simple as possible. The moment you think you need to do something to supplement your pension later, I would say: do not use a turbo," said Rozemuller. "But, suppose you have a very strong vision about Google or gold, or anything with a lot of movement, and you believe you know whether, say Google, will go up or down, then of course you can use a structured product, such as a turbo, and, if you're right with your predictions, then you can earn a lot more.

"For investors who like to speculate, turbos are much more suitable and those people often find our ETFs quite boring," said Rozemuller. "Of course, if your market vision doesn't materialise then you could end up losing a lot of money very fast. That's where the danger lies.

"I often try to explain, especially to retail investors: don't think that you can beat the market or that you can always predict the market. Don't try and invest all your money in turbos, CfDs or similar products because sooner or later you will end up disappointed," said Rozemuller.

"If you still like the excitement and think it is a fun game, and if you like to follow the market, then personally I would rather opt for some kind of core-satellite strategy where the gross of your assets in a very boring way - buy and hold - is invested in ETFs for the long term, at least 10 but preferably 20 years, and in that case I would reassess my asset mix at most once a year.

"As an ex-option trader, I have done things besides my boring ETF portfolio with calls and puts and sometimes even with turbos, but I have learned my lesson," said Rozemuller. "I have simply seen that the part of my assets that I had kept to invest in those products eventually always went to zero. Then you can either transfer money from the other part of your portfolio to be able to speculate again, or you can say: 'this apparently takes a lot of time and effort and ultimately yields nothing, maybe it's safer to stop'. I am more that type of person, but I know that there is a huge market for people who prefer the excitement from time to time.

"That is my vision on these two product groups," said Rozemuller. "I do not think they are 1:1 competitors, I think that for some people structured products are unsuitable products and for others they provide this excitement of which they probably, if they take stock over the course of years, have to conclude that it has cost mostly money."

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