Exchange-traded product (ETP) provider Source was hit earlier this year by the departures of chief development officer MJ Lytle and founder Ted Hood and the closure of its newly launched US-based ETF business, which left a question mark hanging over the firm’s future in the country. In Europe, the firm has been in expansion mode over the last few months and has forged strategic partnerships with JP Morgan and Goldman Sachs to develop its offering. SRP spoke to Peter Thompson (pictured), president of Source, about the firm’s plans, the differences between the US and European ETP markets, and the use of ETFs as underlyings for structured products.

What Source activities over the last two years would you highlight? What are the firm’s short-term plans?
We have had a very interesting couple of years with a number of changes both in the market and internally. At an internal corporate level, such changes included the Warburg Pincus acquisition of a majority stake in the company in May last year. We have invested heavily across the organisation in areas such as capital markets, coverage and research, and have now entered a second phase, which will see us bring new products to the market that we will continue to develop on a collaborative basis with best in class providers of content (an example is the Stoxx Eurozone Exporters). Source is currently in an investment and growth mode, and we want to capitalise on any opportunities that may arise.

Are the changes at management level a reflection of the firm moving into a new phase of development?
We have had a few recent changes in our senior management team which reflect the fact that we’re evolving and adapting the management structure to the needs of the company. We feel we have a very strong team and we feel fortunate to have a number of individuals, which have enabled us to build one of the most experienced senior management teams in the industry. With Lee Kranefuss as executive chairman and James Polisson as chief marketing officer, we are very well placed to continue building on our success and move Source forward.

Why are the US and Europe’s ETFP markets so different? Do you think the gap between the two markets will be closed any time soon?
The US ETF market has been around for some time while the European market is only 15 years old. The differences between the two markets are a reflection of how the investment market is set up in both regions. The trajectory of both markets has been similar, albeit with Europe a few years behind, but we feel that the European market is now in a very interesting position to grow. For the first time, because of the evolution of the market alongside regulatory changes (such as the RDR in the UK), we see that products now reach a wider spectrum of investors. While we are confident and optimistic about the prospects for Source in Europe, we acknowledge there is work to do in terms of education, advertising and branding.

Do you think the use of ETFs as underlyings for structured products will also become popular in Europe?
It is hard to imagine that a product that has been so successful in the US retail market would not have some success in Europe. But I don’t see Europe at the same level as the US any time soon. The US market is uniquely positioned to capitalise on the appeal of ETFs from a tax, retail and distribution perspective. For an ETF provider it is harder to distribute products in Europe simply because Europe is a more fragmented market (countries, languages, currencies, multiple exchanges…). In ten years, we believe this market has the potential to double. The challenges we face are the same as any other provider but Source has the depth and breadth to grow successfully, as it has in the past

Is this is an interesting growth area at Source?
We are open to provide value to investors via ETFs or by using other vehicles that can wrap an ETF. However, these products need on-exchange liquidity. Europe is a fragmented market with many different exchanges, but we think that is an area that could change. If an ETF works fundamentally as a vehicle for structured products in one market, there is no reason for the same type of product not to work in another market. I think this has to do with how the different markets develop and grow. We have seen a pick-up in the number of organisations that are looking at ETFs within the different products that they offer, and those providers are starting to ask those kind of questions. Product providers are considering those options when developing their products suites. In doing so, they are considering a number of factors including whether an ETF should be used as the underlying of a structured product and whether an ETF should be used in multi asset portfolios. We also see the need for education and transparency so that investors understand what ETFs offer and how they differ from other instruments (futures, options, etc.).

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