Interview with Hector McNeil – ETFSecurities

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Interview with Hector McNeil – ETFSecurities …

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Good morning Mr. McNeil, ETF Securities pioneered the development of ETCs and is now the world’s most important ETC issuer. Could you tell our readers something about the beginnings of ETF Securities and how it managed to create a new market practically from scratch?

When I joined ETFS in 2006 I was the 5th person. We had one product and $50m of AUM. By end 2006 we hit c$250m, end 2007 we hit c$1.8bn, end 2008 $5.6bn, 2009 $16bn and c$20bn today. We now have 70 people and we are listed all across Europe and we opened very successful business in New York and Tokyo last year. The story has been a huge success and very enjoyable getting here. I believe we are now the largest independent issuer globally.

When we started with the first few ETCs ETFS Brent Oil (OILB) and Gold Bullion Securities (GBS) most investors were only partially aware of commodities and ETFs. Education was the key. It was hugely beneficial that the markets were kind for commodity returns and over time commodities have become part of most balanced portfolios. Investors have appreciated the limited correlation to bonds and equities, but often with better performance.

Incredibly we now have the 13th largest gold position globally, circa 1m ounces of platinum, 1.5m ounces of palladium and 40m ounces of silver in our custodian vaults. Uniquely these products actually store the physical bullion and are perhaps the most robust financial asset available to investors today. Post Lehman’s this is hot on investor radars.

The early days were hard. Investors did not know commodities as an asset class never mind ETCs. The whole process since day 1 has largely been a focus on education. Educating on different commodities, on ETCs, on liquidity, on structures and much more. I think this is the biggest challenge for anyone in the ETF business today and in the future.

You started off with ETCs and now also provide a wide range of ETFs and Currency ETCs. What features of your products allow you to successfully challenge competitors in such a dynamic ETF and ETC environment?

We feel we always want to occupy the ‘wastelands’. What I mean by this is we don’t want to be the 25th Eurostoxx50 ETF provider. We try to add value by bringing new and innovative product platforms to European investors. These products tend not to have been offered before and are areas of the ETF family not yet developed.

This has been evident with the recent introduction of 28 currency ETCs tracking all G10 currencies long and short against USD and EUR cross rates. These products are unique as they provide local interest rates with full collateral protection. They also trade and settle just like an equity.

We also brought out 23 equity ETFs focused on resource equities including ETFs that track companies in global sectors such as Coal, Steel, Gold Mining, Shipping, Nuclear, Water, Alternative energy, agriculture and basic resources. We also brought out a range of 2 times long and short equity products tracking FTSE MIB, DAX, CAC, Eurostoxx50 and FTSE100. Our equity products are unique it is a joint venture with 4 of the World’s leading banks – Barclays, Citibank, Merrill Lynch and Rabo Bank. This venture is called ‘ETF Exchange’ or ‘ETFX’ for short. This provides much greater liqudity, creativity and the most robust diversification of counterparty risk available. Why would you risk exposure to one bank when you can spread that cross a diversified group? We call this type of ETF ‘Third Generation’.

Do you think Currency ETC will make a difference to the market as ETCs did in the past? What are their strong points and in which situations do you advise investors to use them?

We believe that currencies will be the next big asset class of growth for ETFs. We think that ETFs are most successful where they are pure market access tools. Most investors can’t access the professional FX markets so when they want FX exposure they pay large fees for this access.

With a currency ETC you get the following benefits:

• Transparent:
– Designed to track MSFXSM Currency Indices
• Exposure to Spot Movements and Local Interest Rate Return:
– Total return index provides exposure to both FX movements & local interest rate returns
• Fully Collateralised:
– To negate counterparty exposure
• Simple:
– Maximum loss limited to capital invested
– No maintenance / rolling required
– No derivative mandate needed
– Trade on the LSE or Xetra
– Access to a full & transparent platform

We plan to bring out up to 40 more products before year end.

You are currently present on 9 different exchanges across the world. What drove this choice to diversify across so many markets? Was it to create new ETC markets or was the decision taken for other reasons?

We believe local listings are important for visibility of all investor classes i.e. professional all the way to retail. Investors want to see see listings and news in local papers. We believe it is important to have a local presence and be very visible at all levels. We have always found that increasing listings has had a very postive impact on AUM.

ETF and ETCs prosper even in market downturns as recent history has demonstrated. How are your products dealing with the difficulties of the current market? Are you pleased with your AUM results and volumes of trade?

I believe we have a very robust product set for most market environments. For the hard times investors are going through now we have a very attractive offering. Gold is seen as the ultimate hedge for the risks in the financial system currently. As the growing sovereign risk crisis becomes more acute we expect to see greater flows into ETFS Physical Gold (PHAU) and ETFS Gold Bullion Securities (GBS). Combined they have over $10bn of AUM which makes the Gold ETP now the largest ETP across any asset class by AUM. Next closest is the Eurostoxx50 at $6.7bn.

We have also seen large flows and trading in ETFS Short Euro (SEUR) and also in ETFX DJ Euro Stoxx 50 Double Short (SEU2) / ETFX FTSE MIB Double Short. This has been a reflection of investor’s bearish views on the Euro zone generally. These products have been seen as great ways for investors to either hedge their risks or trade positively in a downward market.

What can you tell us about the future, when do you expect to list new instruments and what sort of products will they be?

It’s safe to say we will be focusing on keeping our dominant position in commodities and will continue to try to innovate in this space. We will also look to increase our currency offering and we have recently announced GBP cross currency ETCs and also ones that will track India Rupee and China Renminbi currencies. These will arguably give emerging market market access is its most liquid form. In the equity offering given this is a venture between ourselves and four banks the offering here could be far broader but is still being worked out.

One thing is for sure ETFS will continue to innovate in this space!

Source: ETFWorld.co.uk