Farley Thomas, head of wholesale distribution at HSBC Global Asset Management, talked earlier today to Paul Amery, editor of IndexUniverse.eu, about the bank’s entry into the ETF market.

IU.eu: Farley, what overall goals have you set yourself in the ETF market?

Thomas: We think there’s a good chance that the European ETF market will be around €500 billion in size in three years’ time, and we’re aiming for a 10% market share. Currently the three largest providers [iShares, Lyxor and db x-trackers – IU.eu] have around an 80% market share, which is unusually large in any industry (with the exception of the auto industry, perhaps). So we’d expect those three large firms to lose share while continuing to gain assets, and we think our 10% market share target for 2012 is reasonable.

IU.eu: You’ve announced the launch of a FTSE 100 ETF on the London Stock Exchange, to be followed by ETFs tracking the DJ Euro Stoxx 50 and the CAC 40. What type of replication methodology will you be using?

Thomas: These three funds will all be fully (physically) replicated. That doesn’t mean that we’re opposed to the swap-based model. We think that, pragmatically, ETF providers should have a series of approaches to hand and then deploy the one that makes most sense for the given index. Next year, depending on our launch timetable, we may well start to roll out some funds using partial or swap-based replication.

IU.eu: Will you use securities lending? How will revenues be split with fund shareholders?

Thomas: Yes, we will do so, within the appropriate risk framework. We’re still finalising the details of the stock lending programme, but we will pass on the majority of revenues earned to ETF investors.

IU.eu: Will all these activities take place within HSBC, or will third parties be involved?

Thomas: HSBC Securities Services will be the agent for our lending, and we will be working very closely with our colleagues in the global markets division to use as many of our internal resources as possible. But we want to ensure that the fund gets the best deal and, if necessary, we will go outside the group.

IU.eu: With your FTSE 100 ETF you will be going head-to-head with one of the biggest ETFs in Europe, the iShares fund of the same name. Are you going to compete on fees?

Thomas: We are setting a total expense ratio of 35 basis points per annum, which makes the fund 5 basis points cheaper than the iShares fund, but not the cheapest available on the market [Lyxor, db x-trackers and Source all offer swap-based FTSE 100 ETFs for 30 basis points per annum – IU.eu].

My sense is that the ETF market is growing very rapidly, and a provider like HSBC ought to be able to expand it rather than focusing primarily on taking business away from the incumbents. We are also entering the ETF business as a household name in many countries, under our existing brand. We think it makes sense to do this and that ETFs should no longer be separately branded by many banks, but should be seen as part of the general toolkit that any financial services provider should have.

IU.eu: So why do you think that so many ETF issuers are branded separately from their parent banks?

Thomas: ETFs were an innovation for many firms and many large banks had distinct and large asset management divisions, so it made sense to have separate branding for the ETF business. I think it’s fair to say that five years ago ETFs were seen by many as a disruptive technology. The view we’re very explicitly endorsing today is that ETFs’ disruptive days are over and it’s now a must-have technology for large financial institutions.

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