Last updated: 18:16 / Thursday, 17 May 2018
Mario Rivero, FlexFunds

Breaking Down the Proliferation of Exchange Traded Products

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Breaking Down the Proliferation of Exchange Traded Products
  • ETPs have grown and evolved enormously since 1992, when the SEC approved the first ETP, the SPDR S&P 500 ETF
  • By 2020, there is likelihood that the global market for ETFs would double up to reach around US$5 trillion
  • Developing nations are likely to represent the fastest growing market over the next five years
  • These ETPs take the best of both worlds by managing the underlying assets like a fund while trading like a note, and allow a vast variety of underlying assets to be securitized quickly and economically.

The SEC published this year a myriad questions about the listing, trading, and marketing, especially to retail investors, of "new, novel, or complex" exchange-traded products (ETPs).

An ETP is a derivatively priced security, meaning that it fluctuates with the price of the underlying securities, which trades on a national stock exchange stock exchange. Such ETPs include exchange-traded funds (ETFs), pooled investment vehicles (FlexETPs), and exchange-traded notes (ETNs). ETPs are typically benchmarked to indices, stocks, commodities, or may be actively managed, explains Mario Rivero, Director at ETP providor FlexFunds.

ETPs have grown and evolved enormously since 1992, when the SEC approved the first ETP, the SPDR S&P 500 ETF. Not surprisingly, the SEC also has received more—and more sophisticated—requests by ETP issuers for relief to allow ETPs to be listed on securities exchanges and requests by securities exchanges to establish listing standards for new types of ETPs.

“ETPs have experienced exponential growth since they were introduced. A recently published report by PwC in January 2015 supports this. It states that by 2020, there is likelihood that the global market for exchange traded fund (ETF) would double up to reach around US$5 trillion.” Says Rivero. While the developed markets of US and Europe are likely to witness majority of this increase, the developing nations (especially Latin America) are likely to represent the fastest growing market over the next five years.

Why the tremendous growth?

The most popular ETP is the ETF. These are securities that track an index,  commodity or basket of assets. ETFs are used by investors to access emerging markets in a diversified manner. “Although 2015 has had an overall negative impact on the stock market in Latin America, the ETFs of Brazil, Mexico and Chile are expected to continue to increase; possibly not in value, but rather in terms of assets.”

In Latin America there are numerous indexed ETFs and it is becoming increasingly difficult to create new funds that are attractive to local and international investors. Other regulated fund options would include SICAVs and UCITs. However, these options have proven to be costly and lengthy to create, and serve the purpose for conservative investors looking for a highly regulated and restricted investment vehicle. Therefore, the growth in number of available funds should come from another source.

Here the opportunity arises for ETPs that are pooled investment vehicles. These ETPs take the best of both worlds by managing the underlying assets like a fund while trading like a note, and allow a vast variety of underlying assets to be securitized quickly and economically.

Pooled and listed investment vehicles, including FlexETPs, are offering the right alternative for the small and medium size fund market that is expected to yield most of the future ETP market growth. Fund sizes from $20m to $200m are too small for the larger global banks and too large for smaller local banks. Granted, the ETP solution must keep the cost structure in check for these smaller funds.

What is most important is that ETPs provide flexibility within asset management for a vast, and fast, product creation. This will provide institutional and private investors with access to niche or customized investment products. As most developed industries have proven, it is targeted products and services what drives significant growth. It is only to be expected that the same will happen in the ETP global market.

 

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