Global and European ETPs:Overview, Flows, and Due Diligence
Stephen Cohen Head of iShares EMEA Investment Strategy and Insights
April 2013
For Professional Investors Only
iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
ETP Market Snapshot
ETP Usage
ETP flow recap
Due Diligence
iShares
Outline
ETP Market Snapshot
iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
Global and European ETP landscape
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Global AUM % market share as at end of February 2013
Europe AUM % market share as at end of February 2013
Global ETP and ETF AUM and Count by year
European ETP and ETF AUM and Count by year
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
Global snapshot
Top 10 providers account for 83% of ETP market share
4,798 ETPs are managed by 182 providers, with $2.037tr of assets under management
iShares is the market leader with 620 ETPs counting for $796 bn of assets under management
Globally there are 3,314 ETFs with $1.85tr of assets under management
Provider *Feb-2013Assets
% Market Share
Feb-2013 Net Flows
# ETPs
iShares 795.7 39.1 4.1 620
State Street 342.1 16.8 (4.3) 176
Vanguard 270.8 13.3 5.0 88
PowerShares 76.8 3.8 (0.8) 193
DB x-trackers 52.6 2.6 0.2 310
Lyxor / Soc Gen 42.5 2.1 (0.2) 210
ETF Securities 28.3 1.4 (0.3) 329
Van Eck Global 26.5 1.3 0.8 55
Nomura Group 25.3 1.2 0.2 43
WisdomTree Investments 23.1 1.1 2.2 47
172 others 353.4 17.3 3.7 2,727
Total 2,037.0 100.0 10.6 4,798
European snapshot
Top 10 providers account for 91.3% of ETP market share
2135 ETPs are managed by 40 providers, with $375.4bn of assets under management
iShares is the market leader with 206 ETPs counting for $145.7bn of assets under management
In Europe there are 1,319 ETFs with $337.7bn of assets under management
Provider *Feb-2013Assets
% Market Share
Feb-2013 Net Flows
# ETPs
iShares 145.7 38.8 1.5 206
DB x-trackers 51.5 13.7 0.2 261
Lyxor/Soc Gen 42.2 11.2 (0.2) 205
ETF Securities 23.5 6.2 (0.4) 304
Credit Suisse 17.4 4.6 (0.2) 58
ZKB 15.1 4.0 (0.3) 9
UBS 14.9 4.0 (0.1) 267
Source Markets 13.3 3.5 0.04 93
Amundi 12.4 3.3 (0.1) 102
Commerzbank 6.6 1.8 0.04 264
30 others 32.8 8.7 0.8 366
Total 375.4 100.0 1.4 2,135
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013. *Providers measured at parent company level
Global and European ETP competitive landscape
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ETP Usage
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Why are ETPs so popular?
Transparency Investors know the ETF holdings, price, and costs
Liquidity ETFs offer two sources of liquidity:
Primary market and secondary market
Diversification ETFs provide immediate exposure to a basket or group of securities for instant diversification
Broad range of asset classes including equities, bonds, commodities, investment themes, etc
Flexibility ETFs are listed on exchanges and can be traded at any time the market is open
Pricing is continuous throughout the day
Cost effectiveness
ETFs offer a cost-effective route to diversified market exposure
The average Total Expense Ratio (TER) for ETFs tend to be less than that for the average index tracking fund active fund
Source: BlackRock, as at end of 2012.
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European ETF clients are primarily institutional, retail adoption slower
Institutional Wealth Managers Intermediary Direct Retail
Main ETF Users
Discretionary AMs
Investment Bank AMs
Broker Dealers
Insurance
Hedge Funds
Pensions (in-house managed assets)
Pensions (externally managed assets) – via consultants
Private Banks
Independent Wealth Managers
(Multi) Family Offices
Platforms (eg fund supermarkets and wraps)
IFA networks
Individual IFA firms
‘Sophisticated’ individual investors
Main ETF Uses
Tactical adjustments
Cash equitisation
Transitions & rebalancing
Core/satellite
Portfolio completion
Duration management & liability matching
Credit strategies
Cash equitisation
Rebalancing
Strategic allocations
Tactical allocations
Thematic exposure
Stand alone products or part of a risk-rated/asset allocation solutions
Core building blocks
Strategic allocations
Tactical allocations
Short-term exposure to markets & asset classes
Core portfolio building blocks
Portfolio construction (ie improve diversification)
Source: BlackRock, as at end of 2012.
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Further demonstrating the shift from tactical to strategic is holding period, where 51% of institutions averaged ETF holding periods of one year or longer, up from 36% in 2011.*
ETF applications in institutional portfolios
Source: 2012 Greenwich Associates - U.S. ETF Research. Reference indication for US only. Base: 62 pensions, foundations and endowments. Interviews conducted between February and April 2012
A recent Greenwich Associates survey indicates that 40% of the pensions, foundations and endowments polled plan to increase their use of ETFs over the next year*
Institutions which were once using ETFs solely for transitions or rebalancing are now using them for increasingly strategic purposes with longer holding periods
Liquidity overlay strategies have surged in popularity among institutional funds, where the % of institutions implementing these strategies has increased from 3% in 2010 to 31% in 2012.*
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ETF usage example: core satellite strategy
ETFs lend themselves to use in both core and satellite portfolios.
Core:
Broad diversification by closely mirroring asset class benchmarks
Consistent performance relative to a benchmark
Low costs
Improved risk management
Satellite:
Precise exposure to a wide range of discrete market sectors, specific styles or market capitalisations indices.
Exposure to selected market segments at low costs
Eliminating security selection or manager selection risk
Source: BlackRock, as at 2012.
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Flow Recap
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YTD flows
Global ETP Cumulative Net Flows/ $Bn Europe ETP Cumulative Net Flows/ $Bn
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
2013
2012
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Global ETPs versus mutual fund flows
Developed Markets Equity ($ bn)
Mutual Fund Flows
ETP Flows
Fixed Income ($ bn) Emerging Markets Equity ($ bn)
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
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ETP flow 13-month rolling net flows and snapshot across exposures ($bn)
Monthly flow comparison – Global
February flows of $10.6 bn ensured the strongest 2-month start for equities
DM equity gathered $13 bn indicating continued strong momentum, while EM equity flows slowed compared to the prior month and HY fixed income witnessed outflows
Dividend income equity continued gathering momentum at $1.6 bn of inflows in February
FI flows reflected the duration rotation theme with investors moving towards the short end of the yield curve. February inflows into short maturity FI ETPs totalled $4.0 bn
Gold is losing its luster with ETP outflows totalling at $5.6 bn in February
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
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iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
ETP flow 13-month rolling net flows and snapshot across exposures ($bn)
Monthly flow comparison – Europe
The momentum of strong ETP inflows continued in February at a similar level to January
Noticeably, EM inflows were the weakest in the equity space, particularly when looking at y-o-y change
There are slightly less ETP flows into equities compared to January with a small uptick in FI inflows
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
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Flow breakdown – Global and Europe
In February 2013 (commodity outflow: $5.1bn) YTD 2013 (commodity outflow: $5.3bn)
In February 2013 (commodity outflow: $1.2bn) YTD 2013 (commodity outflow: $0.8bn)
GLOBAL
EUROPE
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
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Equity overview – February
Global (Mn $) Europe (Mn $)
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
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Europe focus - February
Global (Mn $) Europe (Mn $)
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
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EM country focus
EM Country Flows (Mn $)
China Brazil India
Russia South Korea Mexico
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Source: Bloomberg, BlackRock ETP Landscape. Data as at end of February 2013.
iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
FI - February
Global (Bn $) Europe (Bn $)
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
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iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
Commodities and others - February
Global (Bn $) Europe (Bn $)
Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.
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Due Diligence
iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
BlackRock recently published a global ViewPoint, proposing a series of regulatory reforms and market standards to improve the market place for ETPs. ETP Due Diligence campaign is the next step, offering a framework for ETP due diligence to help investors’ investment process
Investors need to understand structural risk in various ETPs not just market risk
BlackRock proposes a new classification system with three distinct types of ETPs: ETFs, ETNs/ETCs, and ETIs
• For ETFs, physically replicating and derivative replicating ETFs need to be labelled clearly
• ETCs should be reserved for products backed by physical commodities with the rest of the commodity-linked products falling under ETNs
• ETIs is a catch-all for ETPs that are not funds or notes (e.g. warrants)
In our view, best practice means:
• Transparency
• Independence between sponsor and swap counterparty
• Multi counterparties
• Over collateralisation
Due Diligence Overview
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Classification
• UCITS-compliant
• Possible counterparty risk
• Not UCITS-compliant
• Non-fund debt structures
• Effectively unregulated
• Possible counterparty risk
• Neither notesnor funds
• Non UCITS-compliant
Exchange Traded Products (ETPs)
Exchange Traded Funds (ETFs)
• Physically replicating ETFs:
– Fully replicating
– Optimised/partially replicating
• Derivative replicating ETFs
Exchanged Traded Notes
(ETNs)/Exchanged Traded Commodities
(ETCs)
Exchange Traded
Instruments (ETIs)
A new approach to classifying ETPs
Different types of ETPs imply different levels of complexity and carry different structural risks. It is important for investors, especially the retail investor, to be aware of these risks.
iShares proposes a new classification of ETPs that further breaks them out into ETFs, ETNs/ ETCs and ETIs.
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Structure (continued)
Risk and complexity
Investors use ETPs to gain exposure to markets and accept they are taking market risk. They should also be aware of the additional risks associated withETP structures.
Structural risk depends on the counterparty risk and the level of regulation associated with the structure.
Physically replicating ETFs are generally low in complexity and risk, while synthetic ETNs and ETIs, being more opaque, are high in complexity and may carry high risk.
ETP structural complexity and risk
Risk
Physicalreplicating ETF
Synthetic ETN
Derivative replicating ETF
Physical ETC
ETI
Complexity
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Key areas of consideration for ETF selection
• Tax considerations and implications
• Evaluating ETF portfoliomanager performance
• Assess the flexibility to trade when you need to
• How to analyse the true cost of owningan ETF
• Benefits and risks of securities lending inan ETF
• Understand the ETP structure andstructural risk
Tax
3. Performance
5. Total Cost of Ownership
4. Trading and valuation
1. Structure
2. Tax
6. Securities lending
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iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
It all starts with asking the right questions…
iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
Introducing iShares Due Diligence Framework
1. Evaluate the ETP provider
2. Quick rule in rule out criteria
3. Evaluate the product structure
Physicallyreplicating ETF
Derivativereplicating ETF ETCs or ETNs
4. Select the product
General
Performance:tracking error and
tracking difference
Trading and valuation
Total Costof Ownership
Four Steps to ETP Selection
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iShares
iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
AuM ($B) Market Share
759.5 39.3%
336.6 17.4%
245.2 12.7%
73.5 3.8%
51.2 2.6%
42.5 2.2%
28.9 1.5%
27.7 1.4%
21.1 1.1%
19.3 1.0%
327.5 16.9%
Global ETP landscape is concentrated around three providers
Global Providers AuM ($B)1
AuM, $B
The Stats
•$1,933B AuM
•Over 4,700 funds
Source: BlackRock Investment Institute – ETF Research, Bloomberg. Data as at end of 2012.
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iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
European ETP landscape is concentrated around three providers as well
European Providers AuM ($B)1
AuM, $B
AuM ($B) Market Share
140.0 38.1%
50.2 13.7%
42.3 11.5%
24.1 6.6%
17.6 4.8%
16.0 4.4%
14.2 3.9%
13.3 3.6%
11.6 3.2%
6.8 1.9%
30.9 8.4%
Source: BlackRock Investment Institute – ETF Research, Bloomberg. Data as at end of 2012.
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iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
iShares has a strong global footprint in the $1.9 trillion ETP market
North America
• AuM: $1,405B
• 1,714 ETFs
• 58 providers
iShares
• 43% market share
• $600B, 368 ETPs
EMEA
• AuM: $389B
• 2,455 ETFs
• 53 providers (39 Europe)
iShares
• 38% market share
• $140B, 206 ETPs
Total
• AuM: $1,933B
• 4,746 ETFs
• 182 providers
iShares
• 39% market share
• $760B, 621 ETPs
Latin America
• AuM: $12B
• 35 ETFs
• 4 providers
iShares
• 85% market share
• $10B, 20 ETPs
Asia Pacific
• AuM: $127B
• 542 ETFs
• 94 providers
iShares
• 8% market share
• $10B, 27 ETPs
iShares offices
Source: BlackRock Investment Institute – ETF Research, Bloomberg. Data as at end of 2012.
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iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only
Regulatory Information
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