London Bolsters Standing In ETF Space

Terry Flanagan

Europe’s exchange-traded fund (ETF) sector received a boost today as UBS launched 64 of its funds on the London Stock Exchange (LSE), making it the largest single ETF launch in the LSE’s history.

ETFs, which are baskets of stocks and other assets that resemble mutual funds but trade throughout the day on stock exchanges, were invented in the U.S. in 1993 before crossing the Atlantic in 1999 and have been on an upward growth trajectory ever since due to their low costs and simplicity since they generally tracked established indexes, but have struggled somewhat this year in Europe due in no small part to the ongoing eurozone sovereign debt crisis.

“When we look at exchange-traded products over the last 12 years we see a fantastic story of growth and diversification,” said Pietro Poletto, head of ETPs at the London Stock Exchange Group. ETFs are the most popular type of exchange-traded product.

UBS is carrying out the LSE launch through its UBS Global Asset Management business. The Swiss bank has recently expanded its ETF operations. The 64 funds launched today bring the total suite of London ETF listings for UBS to 66 as it listed two earlier ETFs to make sure today’s event went off without any hitches.

“The London listing reinforces our commitment to the UK market and brings UBS’s wide range of ETFs to this important financial centre,” said Clemens Reuter, head of UBS ETFs. “With our ETF range we aim to add value for UK investors by providing tools and building blocks for effective portfolio management. Our ETFs are designed as asset management products, ranging from core holdings to ’satellite’ strategies.”

UBS, which was the second fastest growing ETF provider in Europe last year behind iShares, has hired Deutsche Bank, Commerzbank and Jane Street Capital as market makers to act alongside UBS’s own market-making capabilities. It will also offer over-the-counter deals for clients seeking larger block orders in a bid to woo big institutional investors. UBS is also looking to expand its ETF operations in Italy.

“This move by UBS is quite significant, as many of the ETF providers are seeing the U.K. market as having greater potential given the expected impact of the Retail Distribution Review, which will encourage financial advisers and retail clients to use ETFs,” Deborah Fuhr, a partner at ETFGI, a research consultancy, told Markets Media.

Other ETF providers, such as Vanguard, State Street Global Advisors and Amundi, have expanded in London in recent times as the LSE is being viewed as a burgeoning market for ETFs. London is now second only to Frankfurt in Europe with the number of ETF listings it carries.

“Many institutions are also using ETFs and, in many cases, for multi-asset class investing,” said Fuhr. “The appeal of the London market helps and the LSE also offers capabilities that other exchanges don’t such as the ability to list in different currencies and also that the LSE requires trade reporting, which is a good thing for ETFs.”

Following UBS’s launch today, the LSE now has over 1,000 exchange-traded products listed on its main market, including 644 ETFs.

“There are now over a 1,000 products traded on LSE, offering investors instant, flexible exposure to a vast range of underlyings including benchmark indices, emerging markets, equities, bonds, oil, metals, livestock and currencies,” said the LSE’s Poletto. “UBS’s new funds further strengthen London’s vibrant exchange-traded product marketplace, the most diversified of its kind in Europe.”

The European ETF market, which is more fragmented and roughly a third of the size of its more homogenous U.S. counterpart, is spread over 21 exchanges with 39 providers, according to ETFGI, the research consultancy. As of May 2012, the European ETF industry had 1,319 ETFs, with 4,612 listings and assets of $265.6 billion. In its latest figures, ETFGI said European ETF assets had decreased 8.7% in the month of May with year-to-date assets dipping slightly to 0.7%, from $267.6 billion.

Currently, about two-thirds of all ETFs are traded over-the-counter but upcoming European financial regulation in the form of the revised Markets in Financial Instruments Directive (MiFID II) is likely to push ETF trades on to regulated venues and through centralized clearing in a bid to reduce systemic risk.

ETFs have, in some quarters, been blamed for the U.S. ‘flash crash’ of May 2010 when the Dow Jones Industrial Average index plunged 1,000 points, almost 9%, only to recover within minutes. ETFs have also been fingered for the part they played in the $2.3 billion trading losses that occurred at UBS last year due to the rogue trading activities of Kweku Adoboli. The UBS trader was alleged to have exploited a major loophole in trading ETFs that caused the Swiss bank to incur huge losses on fake positions.

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