ETF market structure and trading protocols are evolving approaches to investment

Deborah Fuhr Hi, this is Deborah Fuhr, managing partner of ETFGI. This is ETF TV – a platform for insights on the use and trading of ETFs. Today, Tom Digby, the head of EMEA client trading at Invesco, will be sharing his insights with us.

Hamish McArthur Tom, welcome to ETF TV.

Tom Digby Nice to be here.

Hamish McArthur So how do you see the battle between active and passive management playing out right now?

Tom Digby So I think it’s been sort of overdone in the press around the battle of active vs passive. I think actually, as an asset manager, you know, Invesco has both. And I think what’s important is to have those clients, to have those decisions. So to be more of a solutions business. There’s a right time to be an active and the right to being passive. But what we do see is, you know, clients on the street working with less and less asset managers. So as a shop, we hope to be able to provide both to to all of our clients, at the right place at the right time.

Hamish McArthur And how do you see what’s happening in Europe differing from what’s happening in the United States?

Tom Digby I guess that’s on many fronts. I mean, in Europe, you’ve got a lot of fragmentation across the ETF landscape fx. In the US, you know, you’ve got one country, one currency, one exchange, really, that everything goes across. In Europe, you’ve got multiple countries, multiple currencies, multiple exchanges, even in a country. You’ve also got a lot more trading OTC in Europe because of that fragmentation. So a lot of RFQ platforms have been very successful in sorting out block solutions for clients to trade ETFs on. So we’ve seen volumes sort of move off the exchange onto these OTC venues. And the biggest sort of risk around that was the transparency. So post-MiFID II, we can now start to see some of those unlit volumes on those RFQ venues, and we’re starting to see around 80% of volumes traded off exchange, which is a huge amount. And that really sort of goes to show the liquidity in these ETFs, and people are now actually seeing that volume present.

Hamish McArthur So what are the risks that you see in the exchange-traded products in Europe?

Tom Digby So I guess in Europe specifically, it sort of comes back down to that understanding where liquidity is, as I previously mentioned. You know, lots of volume is traded OTC and lots of volume is traded on exchange. We sort of see an 80-20% split on that. And it’s really sort of understanding where is the right liquidity for a buy-side to interact with? A lot of people go through the investment process looking at total cost of ownership in terms of tracking error management fees, trying to get better rates on withholding taxes vs different funds. Actually, what we see is, you know, trading spreads becoming a big part of that total cost of ownership, so if you’re holding a five basis points, S&P 500 and you’re trading it really inefficiently at f5-10 basis points every time, that becomes a really big difference. So what we try to do is offer a service where we try to work with our buy-side clients to help make sure that these ETF vehicles, these market access vehicles, are traded as efficiently as possible.

Hamish McArthur Excellent. And finally, what are the innovations in the exchange-traded products space that you’re currently excited by?

Tom Digby So I guess there’s sort of several places to look at. We certainly see it in terms of product. So we’ve recently launched MSCI Saudi Arabia. This is a sort of market access product for investors that, you know, are EM benchmarked and are struggling to get investment into Saudi Arabia because of market access. This product allows you access within to that. That’s certainly been a recent innovation on the product side. In terms of client segment, we see a growing retail market, but it all depends how you sort of judge retail, whether it’s B2B or B2C. That’s certainly a certain innovation in the client space that we’re looking to expand here at Invesco.

Hamish McArthur Fantastic. Tom, thanks for being on ETF TV.

Tom Digby Thank you.

Deborah Fuhr Thank you for watching ETF TV. To view other shows, please go to ETFTV.NET And follow us on LinkedIn and Twitter. Thank you.

Published on August 8, 2019