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Andrew Walsh, UBS

Currency hedged ETFs boom under Swiss care


Swiss bank UBS, headquartered in Zurich has been offering ETFs for some time across continental Europe but it was only in the last few years that they entered the UK market from which point their business has been gaining strong momentum ever since. 

Andrew Walsh (pictured), head of UBS ETFs sales in the UK, explains that the long history of active fund use in the UK had held back the demand for ETFs for a number of years, but since 2013 usage has continued to increase at a steady pace.

"Increasingly, wealth managers and independent financial advisers are using ETFs to meet their clients' needs," he says, and points to particularly strong growth in UBS's currency-hedged ETFs. "Currency-hedged ETFs have been a key area of interest for investors looking to access foreign equity and bond markets."

UBS's ETFs offering hedged exposure to the Eurozone (aka `EMU') equities market have had strong inflows. The UBS ETF MSCI EMU GBP-hedged product launched just 17 months ago has risen to assets under management of over GBP600 million, while the US dollar version, EMU USD-hedged, has gathered assets of USD1.95 billion.

"These products have embedded currency hedging in them, which means that investors are able to separate out the equities bet from the implicit currency bet in an easy-to-trade and very transparent wrapper," Walsh says. "The very large asset managers with for example over GBP100 billion in AUMs will have the ability to do complex currency hedging overlays across multiple portfolios in-house, but smaller asset managers and wealth managers may not have these capabilities and thus these products have been very well received by these types of clients." 

As a result, the key market for this suite of products has tended to be those firms with between GBP100 million and c. GBP20 billion in assets under management. 

He is also seeing more sophisticated independent financial advisers using ETFs and an increase in the number of independent financial advisers attending ETF events and searching out more information on the sector. "There is a lot more awareness than there was even a year ago," he says.

For Walsh, the big strength of ETFs is that they allow investors flexible and transparent access to a large variety of regional and thematic exposures, and with currency-hedged ETFs, investors are able to mitigate the effects of currency fluctuations on their returns when investing in foreign markets.

The EMU products have seen growth due to a disparate view on the Eurozone equities market and that of the Euro. This was in part driven by volatility and events on the macro stage. "For example, there continues to be a well-grounded view that even though Greece is not included in the MSCI EMU index (it is in fact in the MSCI emerging markets index), events in Greece would have a negative impact on the Euro itself and as such would decline against Sterling and the dollar. And they were correct," Walsh says. "Over the last 18 months, those investors who bought our EMU GBP-hedged ETF will have fared considerably better than those who bought the un-hedged version of the EMU ETF." 

There have also been more tactical forces at work. "People believed that what they saw was an undervalued equity market in Europe," Walsh says. "If you compared company valuations between Europe and the US, European blue chips offered a real upside opportunity."

Walsh explains that with currency-hedged ETFs the investor has the ability to separate out the currency bet from the underlying equity bet. "When, as a British investor, you buy abroad, you are implicitly taking a bet on currency movements as well."

Walsh feels that the British election in May also had its part to play in driving wealth advisers to use ETFs for currency hedging.

"An important message with the EMU equity market is that, particularly after the Conservatives won their majority, it probably reinforced the idea that Sterling will continue to strengthen against the euro," he says. "There are also hints of Sterling interest rate increases on the way and all other things being equal, interest rate rises will strengthen a currency of course."

Another development in the wealth adviser market has been the greater appreciation of the benefits of ETFs trading on-exchange. "They are more aware that ETFs are an alternative to active and tracker funds," Walsh says. "Tracker funds don't trade like stocks, they are not traded intra-day. So that transparency which ETFs offer continues to be important and attractive. People can look at their online finance pages and see the price movements and volumes of an ETF moving through the day. If there is a political event or if an interest rate cut was made unexpectedly in the morning, for instance, ETFs enable an investor to act immediately on this news and not have to wait until the end of the day to make a purchase or sale of the fund."

In the US, ETF ownership is made up of roughly 50 per cent institutional and 50 per cent retail investors whereas in the UK and across Europe the figures stand at roughly 85 per cent institutional and 15 per cent retail. Walsh feels that those numbers are set to change.

Within the UK, UBS offers an ETF product range of 164 ETFs tracking a range of indices from equities to commodities to fixed income.

Despite the recent downturn in the commodities markets, broad commodity funds have proved to be of interest with some investors, with money still coming into the sector. Walsh reports that while clients aren't necessarily bullish on commodities, they want some level of exposure as a way to get some de-correlation from other asset classes. 

This exposure can be achieved through ETFs. UBS offers the CMCI composite range of ETFs, which track the UBS Bloomberg CMCI broad commodities index, a second generation commodities product which is designed to reduce the effects of negative roll yield which is a largely inevitable part of any commodities product which has to roll futures contracts to gain their exposure.

In 2009 commodity spot prices were up by close to 50 per cent but investors only made around half that largely because of the damaging effects of rolling futures contracts across all of these various commodities to keep exposure, Walsh explains. 

A futures curve with an upward sloping shape known as `Contango' hurts investors' returns, while the opposite shape is called `backwardation' and benefits investors. When investing in a broad commodities product, it's important for investors to consider how this process is handled by the underlying index which the ETF is tracking.

UCITS has its part to play as well. UCITS diversification rules mean that there must be five underlying assets in an index being tracked to be an actual ETF (as opposed to an ETC or an ETN), so a broad commodities index product fits the bill. 

Investors are also focusing on ETFs a lot more to gain exposure to fixed income. "They continue to be an area of interest," Walsh says. "And offer currency hedging embedded into a number of our fixed income ETFs which is an important consideration because currency fluctuations usually have a disproportionate impact on foreign bond returns as compared to that of foreign equities investing." 

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