Innovation in product and protocol

Deborah Fuhr This is Deborah Fuhr, managing partner of ETFGI. This is ETF TV – a platform for insights on the use trading and product development trends in the ETF industry. Today we have Ivan Gilmore, head of exchange traded products and global product development at the London Stock Exchange, sharing his insights with us.

Dan Barnes Ivan, welcome to ETF TV.

Ivan Gilmore Thank you for having me.

Dan Barnes So to start with, in terms of passive vs active management, who do you think is winning the battle?

Ivan Gilmore I don’t think anyone’s really winning the battle. You know, active is still the much bigger industry globally. Clearly in the US, passive is catching up to active. But in Europe, you know, active is still very dominant. And I guess we have to ask the question, ‘why do investors in Europe prefer or have more money in active strategies?’ I think the ETF industry in Europe is only a small part of overall UCITS funds, about 7-8%. But clearly that delivery of a passive vehicle, which it largely is in Europe, is growing quite fast, not just in AUM, but also trading volumes that are now more transparent. And so I think passive has a long way to go.

Dan Barnes OK, thank you very much. Where do you see the most innovation at the moment in the exchange traded product area?

Ivan Gilmore So it’s a really good question. I think there’s innovation, obviously, in all levels and all areas of the ecosystem, whether it be issuers coming with really interesting products like a block chain ETF, or smart beta, or cheaper smart beta, or just the ESG wrapper on market cap. I think where we’re seeing, as an exchange, more innovation that pertains to trading is really the exchanges plus the the experts in trading, such as investment banks and brokers, delivering new ways of trading to clients so that in the past has been very much on the advisory side and holding a client’s hand. Nowadays, the investment banks and others are investing in ETF algos which understand the sort of fair value or the adjusted theoretical of that ETF at every moment of the trading day. And that allows clients to trade with that understanding of that fair value. And I think that’s a real innovation to watch out for in the next 12-18 months.

Dan Barnes That’s really interesting, thank you. Where would you say the most risk is at the moment in the exchange traded product market?

Ivan Gilmore I think other people have commented on this today at this conference is, that if there was ever a mismatch between the numbers of investors, the value invested in a certain ETF, that the ETF grew to a certain size where the underlying liquidity wasn’t quite there. So if people needed to use the redeem part of the ETF infrastructure, that could be an issue. But I think one great thing about UCITS, which is obviously a very European framework that is now traveling globally, is that UCITS has been around for 30 years. And the number of iterations, four, five, and six of that UCITS framework really dig into these questions of liquidity, concentration, diversification, and the ETF wrapper being so transparent as it is daily transparency, and it allows people to be confident and do the analysis on, could there be a risk there? So I think for now, there doesn’t seem to be a risk of that nature on the horizon.

Dan Barnes You mentioned confidence, that seems to be one of the issues, doesn’t it? Confidence and trust in the products. Where do you think or who do you think can actually help to overcome that issue?

Ivan Gilmore It’s a great question. You know, we joked earlier today that we’ve been trying to educate people and certainly people more knowledgeable than I are, more longstanding experience in the ETF industry, about this education process, around what the product is and what liquidity it can access. So there’s still some work to do. I think what’s different now is that MiFID II has brought it into the limelight for European institutional investors. Platforms over the last really just three to five years have adopted ETFs for retail, much more front and central alongside funds. And I think that now there is much more education online around what that is. I think that is only going to accelerate the understanding of liquidity. I think retail don’t really need to worry so much about liquidity given their size, but institutionally, what I’m hearing at this conference and recent conferences is, that many, many new asset managers are coming into the ETF world to use that exposure. It’s much more tactical. You’ve got much less basis risk to the asset class exposure or the type of style exposure that you want to get to, rather than bond futures or the cost of doing the basket yourself. So I think it’s still an ongoing education, but there’s many more channels now and expertize out there to work with people to to engage in that education.

Dan Barnes That’s great. Ivan, thank you very much.

Ivan Gilmore Thanks for having me.

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

Published on November 19, 2019