Trading European Exchange Traded Products

Transcription

1 For professional investors only Trading European Exchange Traded Products June 2009 One of the most substantial shifts in markets and trading in Europe over the past year has been the dramatic increase in ETF turnover, both in absolute levels and as a proportion of total trading activity. Since January 2008 equity turnover has fallen by over 61% whilst ETF turnover has risen by 27% leading to European exchange traded products accounting for close to 11% of total trading. This document looks at spreads for ETFs over time and intraday trading patterns in terms of spreads and liquidity. On a pan-european basis we consider the trends in products in general with an overview of average spreads and market depth.

2 Table of Contents Introduction and Overview Trading European Exchange Traded Products ( ETPs ) Daily Average Spreads ETF vs Underlying Index European On-Exchange and OTC Volumes Intraday Trading Patterns Global Index Performance ETP Market Overview Equity Index ETF Focus Methodology All trading and spread data as at end April All market performance related data as at end May ishares Europe Sales Strategy and Markets Team Nizam Hamid Managing Director Head of Sales Strategy, Europe nizam.hamid@barclaysglobal.com Kris Walesby Senior Markets Analyst kris.walesby@barclaysglobal.com Slawomir Rzeszotko Markets Analyst slawomir.rzeszotko@barclaysglobal.com For further information please insights@ishares.co.uk 2

3 Introduction and Overview One of the most substantial shifts in markets and trading in Europe over the past year has been the dramatic increase in ETF turnover, both in absolute levels and as a proportion of total trading activity. Whilst equity and fixed income markets have been characterised by sharply higher volatility, with average levels of volatility reaching near record highs, trading volumes have behaved differently. In Europe, if one uses the STOXX 600 as a proxy for a broad group of pan-european equities, one can observe that turnover, on a monthly basis, peaked at 1,400bn in January 2008 but in April this year, it fell sharply to 542bn. Turnover has fallen by over 61% from this relative high point. There has been a similarly rapid decline in trading in Europe s leading futures contract, with notional turnover in the DJ Euro STOXX 50 futures falling from over 1,600bn at the beginning of 2008 to recent levels of 571bn, a decline of around 65%. Over the same period pan-european ETF turnover, as measured by both on-exchange and OTC trades has risen by almost 6% from 46.5bn to close to 59bn. In fact ETF trading activity in Europe peaked in October 2008 at close to 79bn at a time of extreme volatility and as investors generally sought to use high liquidity delta one products to manage portfolio exposures. ETF turnover over the past six months has risen by over 27%, whilst over the past year activity is 120% higher. The overall impact of these trends is that ETFs now feature as a considerably higher proportion of total trading activity in Europe. Over the past year they have risen from a relatively modest 2.8% of total turnover to over 10.8% at the end of April, a small reduction from peak levels of 11.3% reached in February This sustained growth in turnover, against a backdrop of weak market conditions and generally lower trading levels in underlying equities and other delta one products is a strong indication of investor preference for ETFs. Figure 1: European equity and futures turnover Figure 2: European ETP market share 2, , , , , , Jan-08 May-08 Sep-08 Jan-09 May % 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Jan-08 May-08 Sep-08 Jan-09 May-09 STOXX 600 Turnover EURO STOXX 50 futures Notional ETF Turnover as % of market turnover, Citigroup Figure 3: European ETP turnover Figure 4: Average equity and fixed income volatility Jan-08 May-08 Sep-08 Jan-09 May % 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 European ETF Turnover Average Equity Volatility Average Fixed Income, Citigroup 3

4 Trading European ETPs In this report we aim to provide detailed quantitative data relating to main features that investors should consider when trading ETFs. Trading is an important part of assessing the total cost of ownership for different ETFs, however, it can be one of the most challenging areas to analyse due to the plethora of trading venues, complexity and volume of data and the scale of the available number of products. One of the key attractions relating to ETFs is their on-exchange liquidity and accessibility. In order to further investors knowledge and understanding of the trading environment we believe that it is important to track variables such as intraday spreads, how these compare with the underlying securities, onexchange and OTC levels of liquidity and how spreads in general have evolved as market conditions have changed. Main European indices average bid/ask spreads An important comparative statistic for investors considering trading ETFs is how the bid ask spread for the ETF measures up against the equivalent measurement for the underlying equities at an index level. There is a natural benefit to secondary trading volume and general levels of activity when an ETF has a spread which is lower than the underlying securities in the index. It is also useful even in the context of the ETF primary market for investors to be able to compare and monitor trading costs. Ultimately the weighted average spread of the index and the liquidity of the underlying securities represents the best measure of total costs, especially in the context of physical ETFs. The charts on page 5 show the average intraday spreads for the index constituents in the FTSE 100, DAX and DJ Euro STOXX 50 on a daily basis since July The data, sourced from Citigroup, is based on weighted average daily individual constituent spreads and represents a useful indication of the trading costs for the underlying index, although it does not capture any estimate of expected market impact. The ETF related spreads are for the most liquid ishares ETF representative of the index and trading on the most liquid exchange. In both cases the data is shown using the average of 10 day s data in order to provide a better indication of general trends. Lower spreads highlight liquidity and lower trading costs If one considers the FTSE 100 Index and the equivalent ishares ETF, prior to the main jump in volatility in October 2008, these had broadly similar spreads at around 10bps. As market volatility increased the ETF experienced wider spreads with the differential over the index rising to just over 5.8bps at the beginning of November This was not sustained as ETF spreads rapidly decreased such that by the third week of November, ETF spreads were lower than the underlying equity market. This trend has persisted and whilst the widest subsequent spread was a discount of over 5bps in early Daily Average Spreads ETF vs Underlying Index Spreads and rolling 10 day average ETFs spread vs daily spread on underlying securities Figure 5: ishares FTSE 100 spreads Basis points Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 ETF Index, Citigroup Figure 6: ishares FTSE 100 volume m Jul-08 Aug-08 Oct-08 Nov-08 Jan-09 Feb-09 Apr-09 4

5 January 2009, it has recently been relatively steady at around 4.5bps. Over the same period liquidity in the ETF has also remained robust especially in the context of dull underlying equity market activity. In the case of the DAX the trends have been different with the ETF having traded at a consistently lower spread than the equities underlying the index. Even at points of extreme market volatility, unlike with the FTSE 100, ETF spreads remained at a modest discount. The peak differential was over 5.3bps which occurred towards the end of November 2008 and since then the difference has, on average, remained relatively constant at around 3.5bps. The ishares DAX (DE) ETF was the highest ranked ETF in Europe in terms of on-exchange turnover in April 2009 with average daily traded volume of over 88m. Eurozone ETF spreads move in line with the market The Dow Jones Euro STOXX 50 (DE) spread profile in terms of both the index and ETF differs significantly from the trends shown in the FTSE 100 and the DAX. In particular at times of peak volatility in mid-october 2008, the ETF spread jumped to over 28bps and was at a 14bps premium to the spreads in the underlying equities. Overall ETF spreads remained higher than the underlying market until mid-january of this year and recently they have moved broadly in line with both the ETF and the underlying securities have spreads of around 10bps. Daily Average Spreads ETF vs Underlying Index Spreads and rolling 10 day average ETFs spread vs daily spread on underlying securities Figure 7: ishares DAX (DE) spreads Basis points Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09Mar-09 Apr-09 May-09 ETF Index Figure 8: ishares DAX (DE) volume m Jul-08 Aug-08 Oct-08 Nov-08 Jan-09 Feb-09 Apr-09, Citigroup Figure 9: ishares DJ Euro STOXX 50 (DE) spreads Basis points Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 ETF Index Figure 10: ishares DJ Euro STOXX 50 (DE) volume m Jul-08 Aug-08 Oct-08 Nov-08 Jan-09 Feb-09 Apr-09, Citigroup 5

6 European On-Exchange and OTC Volumes The increase in total trading activity in exchange traded products, both on-exchange and OTC has also coincided with changing underlying dynamics of the categories of products that are traded. Unlike in October 2008 when European regional ETFs dominated trading activity, over the past month the main focus has been in single country ETFs. These have accounted for close to 28% of total turnover and reached close to the highest levels seen over the past year. In terms of trading activity, non-delta one products, such as inverse, short and leveraged products are now the second largest category in Europe with trading at over 10.9bn and over 18.6% of total activity. The increased use of these products comes against a background of high levels of volatility that are generally detrimental to their performance in providing a suitable hedge to market moves. Regional ETFs, including indices such as the DJ Euro STOXX 50, have moved from a dominant position to being the third largest category with around 17.6% of the total market. The next most significant area is fixed income which traded over 7.7bn of ETFs giving a market share of over 13%. An important factor in assessing European trading activity is the sizeable amount that is neither reported on an OTC basis nor printed on-exchange. We have aggregated as much available data relating to trading, including OTC data that is reported under various sources such as Bloomberg and Clearstream. This helps provide a more accurate overall estimate of activity. In this context we note that OTC trading currently represents 38% of the total, with the Deutsche Boerse ranking second with 19% of all European trading activity. Figure 11: European ETP turnover by category m 25,000 20,000 15,000 10,000 5,000 0 Jan-08 May-08 Sep-08 Jan-09 May-09 Bond Commodity Country Currency Non Delta 1 Regional Sector Style World Country Table 1: European ETP turnover breakdown Category Turnover (Em) Turnover as % of Total Bond 7, % Commodity 3, % Country 16, % Currency % Non Delta 1 10, % Regional 10, % Sector 3, % Style 2, % World Country 3, % Total 58, % Source: Barclays Global Investors, Bloomberg Source: Barclays Global Investors, Bloomberg Figure 12: April 2009 European on-exchange and printed OTC traded turnover by issuer Figure 13: April 2009 European on-exchange and printed OTC traded turnover by exchange CSFB XMTCH SocGen Other Xact Lyxor db x-trackers ishares 0% 10% 20% 30% 40% 50% 60% Stockholm Milan London EN Paris Other Frankfurt OTC 0% 10% 20% 30% 40% 50% 6

7 Intraday Trading Patterns Intraday trading patterns are important for many investors, especially those that access secondary market liquidity and have a greater focus on electronic connectivity and direct market access trading applications. Understanding the intraday volatility of spreads and the typical dispersion of liquidity can add significant extra information with respect to trading and execution strategies. In order to provide intraday data we have captured bid offer spreads on a minute by minute basis over the course of the trading day for a whole month. In this instance the trading volume can only reflect on-exchange activity that can be captured intraday. A useful example of how the information can be utilised would relate to the implementation of intraday execution strategies with different benchmarks from a performance perspective. Deciding on whether to use a Volume Weighted Average Price (VWAP), or Market on Close (MOC) is typically dependent on the liquidity profile in the secondary market. In the case of ETFs where there is an Figure 14: ishares DAX (DE) Xetra efficient creation and redemption process investors should also take into account the underlying physical assets trading characteristics. Generally one can observe that after the open, ETF liquidity tends to drift ahead of the US market open which is also typical of the underlying physical equity market. Other intraday factors that tend to boost trading volumes include the announcement of US economic statistics. Another important time that is specific to ETFs is the cut-off times for the fund. This is point after which the authorised participants no longer have the ability to create and redeem with the fund for that day. For ishares, many of these cut off times are 3:30 pm London time and it is evident how volumes decline after this point. This profile of on-exchange volumes for ETFs is not mirrored by the trading profile of the underlying securities, where liquidity tends to be concentrated at the open and in the closing market auctions. Figure 15: ishares FTSE 100 LSE :00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16: :00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16: Spread (bps) Traded volume - Euro (rhs) Spread (bps) Traded volume - GBP (rhs) Figure 16: ishares DJ Euro STOXX 50 (DE) Xetra Figure 17: ishares DJ Euro STOXX 50 Xetra :00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16: :00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16: Spread (bps) Traded volume - Euro (rhs) Spread (bps) Traded volume - Euro (rhs) 7

8 Global Index Performance A key feature of equity markets in May 2009 was the modest recovery across the board in the main developed market indices. In Europe the AEX rose by over 7.8%, whilst the more defensive Swiss Market Index was a relative laggard rising by only 2.4%. The outstanding performance in Europe came from Emerging markets with the MSCI EM Eastern Europe Index rising by 24.6%. There were similar trends in the American markets with key developed markets such as the S&P 500 rising by 5.3% in $ terms and with the Nasdaq Composite rising by 3.3%. The MSCI Emerging Market Latin America Index rose by 20.4% in $ terms and 12.6% in. At a single country level, Brazil, as measured by the Bovespa rose by 16.2% in. In Asia market returns were also buoyant with MSCI Japan rising by 6% and the broader MSCI Far East ex-japan Index rising by 13.4%. At a broad global level equity benchmarks managed to maintain the relatively sustained recovery that started in late March After the particularly weak start to the year, the developed market MSCI World rose by 8.6% in May whilst the broad MSCI Emerging Market benchmark rose by 16.7%. Table 2: Global market price performance Europe Index Related ishares ETF Region Apr Close May Close MTD % change local currency MTD % change EUR DJ Euro STOXX 50 EUE & SX5EEX Pan European FTSE 100 ISF United Kingdom DAX DAXEX Germany SMI SMIEX Switzerland FTSE MIB IMIB Italy AEX IAEX Holland MSCI EM Eastern Europe IEER Eastern Europe US and Americas Index Related ishares ETF Region Apr Close May Close MTD % change local currency MTD % change EUR S&P 500 IUSA USA Dow Jones Industrial Average INDUEX USA Nasdaq Composite NDXEX USA MSCI Emerging Market Latin America LTAM Latin America Brazil Bovespa Stock IBZL Brazil Asia Index Related ishares ETF Region Apr Close May Close MTD % change local currency MTD % change EUR Nikkei 225 NKYEX Japan MSCI Japan IJPN Japan MSCI Taiwan ITWN Taiwan MSCI Korea IKOR Korea MSCI Far East ex-japan IFFF Pan Asia Global Index Related ishares ETF Region Apr Close May Close MTD % change local currency MTD % change EUR MSCI World IWRD Global MSCI Emerging Markets IEEM Global

9 ETP Market Overview A ranking of European exchange traded products by on-exchange turnover helps to highlight their position in the context of traded equities. The ETF with the highest traded volume in April was the ishares DAX (DE) ETF on Xetra, with turnover of over 88m which ranked in as the 77th most traded product across main pan-european exchanges. Overall, there are five ETFs in the top 100 traded equities in Europe. It should be noted that many products have multiple listings that splits turnover. In general, average spreads fell during the course of the quarter whilst there was generally an improvement in average depth that investors can trade. Generally ETFs with the highest assets under management have tended to have higher traded volumes. Whilst this still holds for most traditional ETFs, the relatively new short ETFs had relatively high turnover relative to their AUM. Out of the top ten ETFs in Europe in April, the Lyxor CAC 40, had the lowest average spread at 5.38bps, a decrease of over 2bps. The largest depth, at the indicated spread, was in the ishares DJ Euro STOXX 50 (DE) ETF traded on Xetra, with average market depth of over $2.3m, which represented a 15% improvement over the previous quarter. Table 3: European ETP statistics top ten most traded ETPs (by volume) ETF name Lyxor ETF CAC CAC FP ENEXT * negative change is a tightening in spread Equity ranking Symbol AUM EUR millions Average spread (bps) Average depth ( m) Highest Apr volume % ADV exchange Apr 09 quarter Change* Apr 09 quarter % Change ishares DAX (DE) 77 DAXEX GR XETRA ishares FTSE ISF LN LSE XACT Bear 91 XACBEAR SS SSE Lyxor ETF DJ Euro STOXX MSE FP ENEXT ishares DJ Euro STOXX EUE GR XETRA db x-trackers ShortDAX 121 XSDX GR XETRA ishares S&P IUSA GR XETRA ishares DJ Euro STOXX 50 (DE) 138 SX5EEX GR XETRA XACT Bull 143 XACBULL SS SSE Table 4: European ishares statistics top ten most traded European ishares (by volume) ETF name Equity ranking Symbol AUM EUR millions Average spread (bps) Average depth ( m) Highest % Apr volume Change ADV exchange Apr 09 quarter * Apr 09 quarter % Change ishares DAX (DE) 77 DAXEX GR XETRA ishares FTSE ISF LN LSE ishares DJ Euro STOXX EUE GR XETRA ishares S&P IUSA GR XETRA ishares DJ Euro STOXX 50 (DE) 138 SX5EEX GR XETRA ishares Corporate Bond 282 IBCX LN BI ishares MSCI Brazil 296 IBZL LN LSE ishares MSCI Emerging Markets 300 IEEM LN LSE ishares DJ STOXX EUN1 GR XETRA ishares MSCI World 317 IWRD LN LSE * negative change is a tightening in spread 9

10 Equity Index ETF Focus Table 5: Average spread and depth Benchmark: DAX Average spread (bps) Average depth (EUR millions) Company Symbol Apr ADV (Euro '000) Apr 09 quarter % Change* Apr 09 quarter % Change ishares Dublin DAXEX GY % % db x-trackers XDAX GY % % Lyxor LYXDAX GY % % ETF Lab ETFDAX GY % % Benchmark: FTSE 100 Company Symbol Apr ADV (Euro '000) Apr 09 Average spread (bps) quarter % Change* Apr 09 Average depth (EUR millions) quarter % Change ishares Dublin ISF LN % % Lyxor L100 LN % % ishares DE UKXEX GY % % db x-trackers XUKX LN % % UBS UBSF100 VX % % Source SF100 GY Not Listed n/a Not Listed n/a Benchmark: DJ Euro STOXX 50 Company Symbol Apr ADV (Euro '000) Apr 09 Average spread (bps) quarter % Change* Apr 09 Average depth (EUR millions) quarter % Change Lyxor MSE FP % % ishares DE SX5EEX GY % % ishares Dublin EUN2 GY % % db x-trackers XESX GY % % ETF Lab ETFSX5E GY % % UBS FSEU50 SW % % Easy ETF ETD FP % % Source SDJE50 GY Not Listed n/a Not Listed n/a BBVA BBVAE SM % % Comstage CBSX5T GY % % Credit Agricole C50 FP % % * negative change is a tightening in spread 10

11 Equity Benchmarks ETF Focus Table 5: Average spread and depth Benchmark: World Average spread (bps) Average depth (EUR millions) Company Symbol Apr ADV (Euro '000) Apr 09 quarter % Change* Apr 09 quarter % Change ishares Dublin IWRD LN % % db x-trackers XMWO GY % % Lyxor WLD FP % % Source SMSWLD GY Not Listed n/a Not Listed n/a UBS UBSWLD GY % % Benchmark: Emerging Markets Average spread (bps) Average depth (EUR millions) Company Symbol Apr ADV (Euro '000) Apr 09 quarter % Change* Apr 09 quarter % Change ishares Dublin IEEM LN % % db x-trackers XMEM GY % % Lyxor LYXLEM GY % % Credit Suisse XMMEM SW % % Benchmark: MIB Average spread (bps) Average depth (EUR millions) Company Symbol Apr ADV (Euro '000) Apr 09 quarter % Change* Apr 09 quarter % Change Lyxor ETFMIB IM % % ishares Dublin IMIB IM % % db x-trackers XMIB IM % % Benchmark: SMI Average spread (bps) Average depth (EUR millions) Company Symbol Apr ADV (Euro '000) Apr 09 quarter % Change* Apr 09 quarter % Change Credit Suisse XMSMI SW % % ishares Dublin SMIEX GY % % UBS FRESMI SW % % db x-trackers XSMI SW % % * negative change is a tightening in spread 11

12 Methodology Introduction Spreads Source Bloomberg Type Full bid/ask spread Period 8:00am - 4:30pm London time - all trading days for relevant month Measurement Basis points - average for relevant month Related equation =Bid/(((Bid + Ask)/2)-Bid) Methodology Minute by minute data where both bid and ask price exist for that minute Average Daily Volumes (ADVs) Source Bloomberg Measurement Volume of trades vs Traded Price for every minute for all trading days, averaged by hour for trading days Currency Base Top ten highlights AUM Source Bloomberg Indices Source Measurement Currency Bloomberg Previous month's closing index level v most recent end month EUR Average Daily Volumes (ADVs) Source Measurement Currency Bloomberg Equity turnover in base currency for every trading day from all exchanges + OTC printed volumes available translated into Euro EUR 12

13 ETF Focus Spreads Source Type Period Measurement Related equation Methodology Depth Source Type Measurement Methodology Bloomberg Full bid/ask spread 8:00am - 4:30pm London time - all trading days for relevant month Basis points - average for relevant month =Bid/(((Bid + Ask)/2)-Bid) Minute by minute data where both bid and ask price exist for that minute Bloomberg Depth associated with Best Bid or Offer EUR Ten minute snapshots for > 75% of trading month 13

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16 Contact us For more information on all ishares ETFs, please visit our website on Alternatively, please call us on: From the UK: From France From Switzerland: From Netherlands: From Luxembourg: From Germany: +49 (0) Regulatory Information Barclays Global Investors Limited ('BGIL'), which is authorised and regulated by the Financial Services Authority ('FSA'), has issued this document for access by Professional Clients in Germany, Italy, Switzerland, the Netherlands and the UK only and no other person should rely upon the information contained within it. ishares plc, ishares II plc and ishares III plc (together 'the Companies') are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Financial Regulator. The German domiciled funds are "undertakings for collective investment in conformity with the directives" within the meaning of the German Law on the investments. 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