Zurich headquartered Swiss bank UBS has offered ETFs since 2001 but stepped up with their ETF offering in the UK and across continental Europe just two and a half years ago. Andrew Walsh, head of UBS ETF sales in the UK explains that the bank saw strong potential in the UK, which was slower at taking to ETFs than other countries.
“Generally speaking there’s been a long history of active fund use in the UK and there is still a some way to go before the full benefits of ETFs are appreciated by UK investors . But now it’s all change with a realisation and acknowledgement that ETFs aren’t a product that necessarily competes with active investment, but can be complementary to it” he says.
For Walsh, the big strength of ETFs is that they allow investors macro exposure to their active view. “Independent financial advisers are increasingly using them, whereas historically they were more likely to be using traditional tracker funds” he says.
“The main difference with an ETF is that it trades intraday like a single stock. “So, for example, if an interest rate cut was made unexpectedly in the morning, ETFs enable an investor to act immediately on this and not have to wait until the end of the day to make a purchase. Additionally, investors also appreciate the transparency which ETFs offer – that they can see the price movements and volumes ticking up on their screens” Walsh says.
In the US, ETF ownership is made up of roughly 50 per cent institutional and 50 per cent retail whereas in the UK and across Europe the figures stand at roughly 85 per cent institutional and 15 per cent retail.
Within the UK, UBS offers an ETF product range of 164 ETFs tracking a range of indices from equities to commodities to fixed income.
The biggest growth story has come in their range of currency hedged equity ETFs. “Imagine investing in the Eurozone” Walsh says. “Two years ago buying into that story, you could have believed in the upside for equities but also believed that the Euro would be likely to depreciate against Sterling by the same amount, so you could have ended up with a flat net-net position.”
However, with currency hedging embedded into the ETF, investors can buy into the Eurozone equity story with protection against the Euro decline.
Some 15 months ago, UBS launched the UBS ETF MSCI EMU GBP-Hedged product which has seen very strong growth in assets under management. In the last two months alone, they have seen that ETF increase its AUMs from GBP346 million to a current figure of GBP550 million.
“The main conviction was that there were signs that the European equity market was beginning to pick up and you started to see money flowing in” Walsh says. “There was lots of conviction but also a realisation that now, you could buy the market and do something about mitigating currency risk where previously they would have walked away from the trade.”
Another interesting aspect new development with the suite of EMU-hedged products is that they have seen British and other European investors who are choosing the dollar hedged version, which means that investors are using them for tactical allocation. The dollar hedged product has reached AUMs of GBP1.05 billion in 15 months, gaining from the GBP674 million in AUMs at the end of February.
Broad commodity funds have also proved popular with investors. UBS has seen around. USD120 million inflows in the last few months into their UBS CMCI Composite broad commodities ETF with up to USD520 million under management.
“The clients aren’t massively bullish on commodities but some investors are starting to feel ‘I should have some exposure to commodities’” Walsh says and UCITS diversification rules mean that there must be five underlying assets in an index being tracked to be an ETF, so a broad commodities index product fits the bill.
The CMCI broad commodities index is a second-generation commodities product which helps to mitigate the effects of negative roll yield inevitable with a product based on rolling futures. “In 2009 commodity spot prices were up by close to 50 per cent but investors only made around half that because of the effects of rolling futures contracts to keep exposure” Walsh says.
Contango hurts investors, backwardation benefits and it's when investing in a broad commodities product that it's important for investors to consider how this process is handled by the index which the ETF is tracking, Walsh advises.