Platform Or Single Issuer?

More and more serious players are staking a claim in the European ETF market, but issuer business models are diverging.

Today’s news from Source that three new firms are joining its exchange-traded products platform is a sign of serious intent.  The names of the new participants – Japanese securities house Nomura, Italian bank IMI and leading Dutch market-maker IMC – give an intriguing hint at the way the ETF market might be heading.  Source’s three original platform members – Goldman Sachs, Morgan Stanley and Bank of America Merrill Lynch – are all (former) US investment banks, whereas the new participants can clearly add distribution outlets in new geographical areas, as well as trading expertise.

Source’s head of marketing, MJ Lytle, told me this morning that, while the platform would ideally like to have a limited number of swap counterparties involved in the creation of synthetic ETFs – probably up to ten – the number of participants in the Source platform is not limited, and they expect several more firms to join the current six.

Meanwhile ETF Securities’ new platform venture, ETF Exchange, has a new chief executive, as we reported last week and, while we await confirmation of the names of the platform participants, ETF Securities has already launched into a new area of the ETF market with this week’s listing of a series of double-leveraged and double-inverse funds.

Hector McNeil of ETF Securities has previously argued that it makes more sense for multiple financial institutions to cooperate in offering investors a range of counterparties under a single ETF issuance platform, rather than working separately and offering, say, ten different versions of a DJ Euro Stoxx 50 ETF, with very little to distinguish them except the names of the financial backers.

Will the “platform” business model work, as advertised, to give investors a more secure product from the point of view of counterparty exposure, with enhanced secondary market trading liquidity? Or will the predominant ETF market model of single issuer and single brand continue, with firms having to compete either on the basis of name recognition or price?

As an example of the latter business strategy, Credit Suisse is due to expand its ETF range with a launch of new funds at the beginning of July.  The Swiss bank, via its XMTCH brand, is already the fifth-largest European ETF issuer, and has ambitious plans to build on its existing, largely Swiss-domiciled investor base.

Whichever way the market goes in future, or even if these two business models coexist, it’s clear that competition for European ETF business is hotting up.  And this should be good news for investors, as the arrival of new participants should spur product innovation and keep costs down.

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