iShares, Source And Where Are The Brits?

Where does the possible Goldman bid for iShares leave Source, and where are the Brits in the ETF business?There’s been plenty of intriguing news over the last few days.

Goldman Sachs enters the fray – reports since the weekend suggest strongly that the US bank is preparing to bid for iShares. Offers for Barclays’ fund management business are due to be submitted on Friday, so we can expect some clarification on the outcome next week, if not before.

But where would a successful bid leave Source, the soon-to-be-launched ETF joint venture between Goldman, Morgan Stanley (and possibly Merrill Lynch, or should I say Bank of America, if reports are to be believed)? Surely Goldman wouldn’t buy iShares and launch Source as well? Is Merrill being lined up as a replacement for Goldman? The press offices of Morgan Stanley and Goldman Sachs were pretty cagy about Source’s launch date, when I spoke to them last week to request an interview with the people running the venture – and that was before the possible Goldman bid for BGI hit the news. Will Source even take off, or is Goldman preparing to leave Morgan Stanley as a jilted bride?

Then there’s Lyxor’s entry into the ETN market, with an innovative and collateralised commodity structure. Collateralised ETNs are probably the way forward since concerns about bank counterparty risk became so widespread, but what should we make of the charging structure within these ETNs, with a fixed annual charge (similar to an ETF total expense ratio), but also a variable collateral charge?  Since Lyxor is clearly planning to issue a series of these ETNs tracking different single commodities, how are we to evaluate them against the single commodity ETCs offered by ETF Securities? There are some subtle differences in collateral policies and legal structures between the two firms’ offerings, which we will attempt to delve into.

German issuer ETFlab has continued to build up its fixed income ETF range, coordinating its launch of six new funds earlier this week with the launch of new indices on German government debt by Deutsche Boerse’s index team. ETFlab is clearly aiming to compete with iShares’ German government ETFs, which are based on the eb.rexx indices.

I watch the newer German entrants to the ETF market, ETFlab and Comstage, build their fund ranges and attempt to follow in the steps of db x-trackers, which has built an €20 billion business in under two years. Then I consider the healthy competition in France between issuers Lyxor, EasyETF, CASAM and SGAM.  By contrast, the weakness of British banks in the European ETF market stands out.  We’re now witnessing the likely sale of the single major UK-based ETF issuer into foreign hands (I haven’t forgotten ETF Securities, but up to now its non-ETC range is relatively small, and focussed on a single asset class). Perhaps financial markets left behind questions of nationality a long time ago (though somehow I doubt it). Whichever way you look at it, it’s an indictment of most UK banks’ management that they have completely ignored one of the fastest growth areas in the fund management business.

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