I think something much simpler is going on. It’s a trend I see happening here in the United States, just as surely as it’s happening in Europe. With ETFs taking an increasing share of investor assets, managers charged with protecting a bank’s delta one desk are launching ETFs…because everyone else is doing it too.
Dan Draper is right when he points out in your blog that a line-up of ETFs costs very little to maintain. A few million dollars will suffice to get your products up and trading on the market.
But I don’t buy his argument that banks are launching ETFs to capitalise on dividend-related tax arbitrage or to justify an OTC derivatives business. You run into a chicken-and-the-egg problem. If a bank launches a line of ETFs that is unsuccessful, it won’t have sufficient assets to support much in the way of derivatives, or to provide much in the way of a profit centre for dividend-related tax arbitrage.
All the ancillary benefits Draper outlines are predicated on having significant assets in the ETF family, and if you have significant assets in the ETF family, it’s likely turning a profit on its own. The ancillary benefits are…well…ancillary.
That’s why you hear rumours of various ETF line-ups being closed down in Europe, because despite Draper’s suggestion, they do cost some money to run and banks aren’t in the business of losing money.
I think what’s happening is quite simple. Banks are watching the flood of assets into ETFs and saying to themselves, I wanna get me a piece of that. They figure they can run a Dow Jones Euro Stoxx 50 ETF just as well as the next guy, and they hate to see their clients putting money into competitors’ products. They figure they’ll launch their own products and hope that simply standing in front of the wave of assets will translate into product inflows.
There’s also, I think, an element of career protection here. No one wants to be the guy at a bank who failed to greenlight an ETF line-up—not when they are growing at 30%-40% per year. It’s riskier, in some ways, not to launch a family of ETFs.
Finally, there is a degree of optionality at work here. There’s a chance that new regulations like the UK’s Retail Distribution Review will drive a significant jump in ETF growth. Again, banks don’t want to be caught flat-footed if that happens.
I’m sure Draper’s right that banks gain a lot of side benefits from having ETFs. But I don’t believe that they are launching ETF families as loss-leaders. To gain those benefits, the ETFs have to be successful. And if they’re successful…well, the ETFs will stand on their own.