February 2016 was a record month of exchange-traded products (ETP) trading with £6.8bn value traded on London Stock Exchange's (LSE) order-book, a 4% increase on the previous all-time record set in January 2015.
The LSE recorded 166 new exchange-traded funds (ETFs) in 2015 alongside 55 exchange-traded commodities (ETCs) and notes (ETNs) more than any other European exchange which suggests that there is appetite for these products, according to Lida Eslami, manager, listed products at the LSE.
"Strong demand from both institutional and retail investors in investing into cost-efficient, diversified products has contributed to this growth. We believe this positive trend will continue," said Eslami.
The UK ETP market is lagging behind some other European markets mainly because of the offer available but banks such as Societe Generale (as well as UBS and Deutsche Bank, both with an ETC range, and Barclays which has a range linked to the VIX and VStoxx indices) are expanding their product catalogues and the assets available to match the offering in other markets such as Germany or Italy.
"We are working on expanding our UK ETP market in range and assets available as it is definitely a growing segment, and we believe there are opportunities to provide value to sophisticated investors," said Alexandre Houpert, head of cross asset retail distribution sales, Europe at Societe Generale. "We have been investing in our ETP business over the last two years to complete our range of products, most recently we have added S&L x5 leverage to our FTSE-linked listed range, complementing our commodities and currency offerings."
According to data released by the LSE, the S&L ETP market traded €31.6bn in 2015 with SG trading €17bn, which represents a 54% market share. The S&L segment in the LSE is "very dynamic and continues to grow" and is currently trading in excess of £30m per day, according to Houpert. "Not as many investment banks are involved in the ETP market because to serve this market a provider has to have access to liquidity, and not all investment banks have market making capabilities". "We see it as a key market for our business. For us, it is just a question of leveraging our engine. In the UK, our main competitors in the S&L ETP market have a different set up. We are well positioned to continue growing our business and our offering."
According to Ryan Rogowski (pictured), head of cross-asset distribution sales, UK & Ireland at Societe Generale, the S&L ETP market is relatively new in a broad UK market where there is an "enormous choice for investors trading across many underlying in different types of wrappers".
"Our strategy is pretty straight forward and is focused on providing alternatives to investors," said Rogowski. "With 26 products of our S&L range listed on exchange, we see that trading volumes across the board have increased over the last year and in terms of percentage growth we see a steep curve on the average daily traded volumes, and this we think is linked to the increase in choice."
S&L ETPs have an advantage over other leverage instruments in that they can be deployed in an ISA or a SIPP, and investors don't need to open dedicated accounts to trade these products which makes them an attractive vehicle for sophisticated investors, according to Rogowski. "As a bank we can leverage our European franchise with a very robust front-to-back product offering which includes product issuance, the ability to provide our own underlying hedges and the market making of our products on exchange," said Rogowski. "Those three elements provide us with a significant competitive advantage and we want to continue capitalising on that."
Specialist S&L ETP provider Boost ETP, one of SG's main competitor in the S&L segment alongside ETF Securities, announced a record $1.5bn of total monthly exchange turnover in February this year, across all 64 Boost S&L products which represents a 186% increase year-on-year and 22% since January.
Boost trading volumes are predominantly comprised of Borsa Italiana and LSE flow at $1.2bn and $0.3bn respectively with volumes on Xetra growing at an average rate of 43% month-to-month. In the same time period, Boost saw its turnover on the Borsa Italiana and LSE growing by 72% since November 2015 and 127% when compared to trading volumes from one year ago.
"We have seen consistent growth in assets across both our ETP and Ucits ETF platforms, and have reached record AUM levels growing by nearly 200% over the past year, as clients recognise the benefits and uses of these differentiated products," said Hector McNeil, co-CEO at WisdomTree Europe, adding that the global S&L ETP/ETF industry continues to hold steady at near record highs of $68.3bn or +14% for 2015.
Total ETP's on-exchange turnover for 2015 was £256.7bn through 3.3m trades, up by 38% YoY. February also registered a new record for ETFs with £6.8bn traded on LSE's order-book (electronic execution) plus £1.6bn traded on ETC/ETNs. Total on-exchange turnover for ETPs in February was £30bn. The exchange also reported "a good month" in terms of listings with 30 new ETFs of which some were featuring fixed income assets and smart beta strategies.
The 30 ETFs listed in February include 11 SPDR fixed income ETFs, providing exposure to US Treasury and European Government bonds; nine UBS ETFs - eight smart beta products, providing alternative factor exposure to US and European equity, and one fixed income ETF; four Vanguard fixed income ETFs tracking US and European corporate and government bond indexes; four Amundi equity based products including a product tracking the Russell 2000 and one providing exposure to Japan, a key space of growth for ETFs in the past year; and two Source equity based ETFs providing US exposure to both the financial services and the real estate sector of the US business industry.
Year to date, the LSE has listed 37 ETFs/ETPs, 11 more than for the same period last year - a 42% increase. January saw the listing of the first ETF to provide exposure to Israel and their Tel-Aviv 25 Index from iShares, as well as the world's first Euro Stoxx High Dividend Low Volatility ETF from Invesco Powershares. Overall, 893 ETFs and 395 ETPs now listed on London Stock Exchange.
"ETFs track well known equity, fixed income indices and are well-diversified Ucits compliance products and continue to dominate the ETP market," said LSE's Eslami. "However, we have also seen significant activity around ETCs tracking precious metals especially short and leverage strategies were investors could be more tactical in their trading as a result of the increased volatility in the commodities market (ie. gold). ETCs can provide a very efficient access for institutional and retail investors seeking exposure to the commodities market. Our data shows that gold as an underlying traded almost three times higher than the average since August 2011 as a result of market uncertainties."
According to Eslami, there has been "exciting growth" in secondary market trading and the exchange expects "appetite for these products to remain very strong". "The activity on LSE's ETP segment reflects the global growth of this segment which now exceeds US$3tr," said Eslami. "In Europe, assets under management in the ETP segment reached over US$500bn in 2015."
The French bank was the most active bank in the LSE ETP segment in 2015 with a number of developments including the launch of the SG Twenty20 Global Explorer ETN, a smart tracker note linked to the performance of a basket of exchange-traded funds (ETFs) which are updated on a monthly basis, launched on December 2015; as well as the introduction of a range of credit linked notes (CLN) which was followed shortly after by its suite of short & leverage ETPs.
SG is also seeking to capitalise in its platform distribution besides offering ETPs through the exchange, according to Houpert. "We can also leverage our platform distribution capabilities via SG's Alpha platform and our online banking service to respond to any requests relating to our ETP offering from professional investors," said Houpert.
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