During the first half of this year, 231 ETPs were delisted from European exchanges compared with 189 for the whole of 2012, according to data from consultancy ETFGI.
Arnaud Llinas, Lyxor’s global head of ETFs and indexing, said: “There are definitely too many products in Europe. There are more ETPs in Europe than the US. I’m not surprised that the market is rationalising now in terms of number of products.”
Compared with the US, the European ETP market presents a fragmented picture, with issuers required to list products across many regional exchanges, clearing and settlement systems. Each product could be listed on as many as five exchanges.
At the end of June, the European industry had 1,954 ETPs, with 6,156 listings, and assets of $357 billion, compared with 1,478 ETPs, 1,478 listings, and assets of $1.44 trillion in the US, according to ETFGI.
Some of this fragmentation is regulatory-driven: Switzerland, for example, forces providers to list on its local exchange if they want to market their products in the country. In addition, issuers have seen it as necessary to have a shop window in each jurisdiction to target retail customers.
In recognition of how disparate the European market has become, and to concentrate liquidity, issuers are rethinking their strategy.
Deborah Fuhr, founding partner of ETFGI, said: “In the early days of ETPs in Europe, many people thought that marketing and listing should go hand in hand, especially if you wanted to sell to retail and financial advisers. However, there are considerable costs involved with maintaining multiple cross-listings and it fragments liquidity across multiple exchanges.”
The ETFGI data shows the number of new listings on European exchanges has also slowed considerably, from 758 for the whole of last year to 295 so far this year. New listings peaked at 1,589 in 2010.
Leland Clemons, head of iShares capital markets for Europe, Middle East and Africa at BlackRock, said: “We are trying to take a more proactive approach to developing the market structure for ETPs. We would like to see liquidity better consolidated to make the investor experience better. From my perspective, the European ETP market structure or ecosystem has developed a bit from when the proliferation of listings began five or six years ago.”
Clemons said rule changes set to come in with a revised version of the Markets in Financial Instruments Directive are also driving change. The directive is not expected to come into force before 2015, but its draft form calls for increased reporting of trades, and the greater transparency this will bring will highlight products that lack volume, he said. Recent industry initiatives are also thought likely to consolidate the market.
Bats Chi-X Europe, the largest pan-European cash equities trading platform, is exploring using trade order routing techniques to direct investors to the most liquid products. For example, an investor looking to buy the iShares Euro Stoxx 50 ETF, which is traded on six European exchanges, would be directed to the most liquid of these listings.
BlackRock and settlement giant Euroclear have also made a move to improve the European ETP market, with plans to create one international central securities depository that would allow ETPs to be settled in one place rather than nationally.
But issuers say delistings and consolidation will also see some market participants lose out.
The five largest European exchanges have lost 194 listings so far this year, compared with 51 in the first six months of last year.
According to ETFGI, Borsa Italiana has been the worst hit of Europe’s exchanges, having seen 57 ETPs delisted from its platform so far this year (see chart).
NYSE Euronext’s Paris exchange has lost 43 ETPs; German exchange Deutsche Börse, 35; the London Stock Exchange, 34; and Switzerland’s Six Swiss Exchange, 25.
Silvia Bosoni, Borsa Italiana’s head of ETF listing, said despite recent delistings the market remained popular. She said: “There are no Italian issuers of ETFs, which means Italy is often the first market issuers list in after their domestic market. Issuers have to be alive to the fact that most Italian investors in Italy are not very keen to invest in something not listed in Italy.”
Providers say the LSE has benefited from its position as a hub for Europe, cemented by a number of US issuers that have come into the market and used the LSE as a launch pad. The Six Swiss Exchange, meanwhile, has been protected by its regulatory framework.
According to issuers, the primary consideration when it comes to delistings is geographical positioning and running costs.
Although all the exchanges offer deals for multiple listings, new issuers and annual fees, an individual listing of an ETF on Borsa Italiana costs €8,500; on NYSE Euronext, €7,500; LSE charges £5,000 (€5,807); Deutsche Börse, €3,500, and it costs Sfr3,000 (€2,425) plus charges for new equity securities in relation to market capitalisation on the Six Swiss Exchange.
Manooj Mistry, head of ETPs for Europe, the Middle East and Africa at Deutsche Bank’s Asset and Wealth Management unit, said: “Listing fees are a component of the costs so you need to take into consideration that some exchanges are more expensive than others.”
According to ETFGI research, Lyxor has delisted the most products this year with 53, followed by Royal Bank of Scotland, 42, iShares at 40 and ETF Securities with 38.
Matt Johnson, head of distribution for Europe, Middle East and Africa at ETF Securities, said: “The rationale is, of course, based on economics. Multiple listings incur a cost that is both direct, such as legal time, and indirect, such as marketmaker support.
“We’ll certainly be keeping all of this in mind when listing new or cross-listing existing products and as we continue our six-monthly reviews of potential delistings,” he said.
• Global product shutdowns hit record level
The number of closures of global exchange-traded products hit a record 117 in the first six months of this year, according to ETP consultancy ETFGI.
Providers have engaged in rapid expansion in recent years, with the number of global ETPs rising by 217% since 2008 and hitting a growth peak between 2009 and 2010 of 32%.
But this has slowed over the last 18 months, to 8.8% from 2011 to 2012 and 2.6% in the six months to June, according to ETFGI.
Market participants have attributed the change to a smaller number of benchmarks still available for new products and a move by issuers to take stock of their portfolios after high levels of growth.
Deborah Fuhr, founding partner of ETFGI, said: “There has been a decline in the number of new launches as most of the core benchmarks in core asset classes are already covered by ETPs. There is a first-mover advantage when bringing an ETP to market. Many firms are [now] working to grow the assets in their existing products.”
Earlier this month, db X-trackers, the ETP arm of Deutsche Bank, announced the largest number of closures at one time by a single provider, with 36 ETPs set to disappear. The bank attributed the closures to “low levels of interest”.
The figure is not included in the first-half global total because the products are still in the process of being closed.
Manooj Mistry, head of ETPs for Europe, the Middle East and Africa at Deutsche Bank’s Asset and Wealth Management unit, said: “Over the past few years we have very much been in expansion mode in terms of products we’ve launched.
“We felt we reached a stage in our evolution where it made sense to review our product range in terms of whether there had been the anticipated demand and turnover on exchange we had expected.
“Some products had not met these levels after a fair time period of around five years so we have decided to close them.”
The majority of the db X-trackers closures are in niche products that have failed to grow substantial assets, said Mistry. Some issuers said that rapid growth and innovation in the ETP industry had led to a number of more specialist products being created that are harder to market and can take a long time to build assets.
–This article first appeared in the print edition of Financial News dated July 22, 2013
Carl A R Weir's Blog 