Ben Thompson How to Trade ETFs Moderator Director, Business Development, & Listed Products Lyxor UK Introduction What is an Exchange Traded Fund?  Exchange Traded Funds (ETFs) are open-ended investment funds that track the performance of a diversified index containing at least 5 different assets. ACCESS REGULATED FLEXIBLE SIMPLE TRANSPARENT Access a whole market sector, region, theme, commodity REGULATED basket or fixed income strategy in a single fund MARKET Highly regulated according to theACCESS European regulatory framework of the UCITS IV Directive and the exchange Trade on exchange with liveFLEXIBLE pricing throughout market hours and the flexibility to trade in or out just like a share SIMPLE The aim of an ETF is simply to track a Benchmark Index as cost effectively and preciselyTRANSPARENT as possible. Complete transparency over costs, risks, performance and fund holdings What Can You Trade In?  Can be used to access a wide variety of asset classes, themes, sectors and geographies *As of May, 2012 Using ETFs in a Portfolio      ETFs are used by all types of investor; from large institutions to individual retail clients As a passive tracking investment, the objective is simply to achieve the market return Creates a simple risk / reward profile; if the Index moves 5%, the ETF aims to move 5% too Covers the whole risk spectrum from Government Bonds to individual Emerging Markets Used for either capital growth (Capitalising ETFs), or income (Distributing ETFs) » Invest tactically to take advantage of shorter trends or opportunities » Build an efficient, low cost core portfolio to capture long term growth *As of May, 2012 Why ETFs Trade Just Like A Share How Do You Trade? Trading an ETF is as easy as buying or selling a share       Prices are provided on the London Stock Exchange during market hours (08.00 – 16.30) As such they are governed by the rules of the exchange for liquidity and spread You buy at the Ask price and sell at the Bid price The difference between the Bid and Ask price is called the Spread They are eligible for trading direct, in a Stocks & Shares ISA or SIPP account Single cash settlement process just like a share SELL PRICE BUY PRICE BID £9.99 ASK £10.00 SPREAD Where Can You Trade?   Most IFAs and investors will trade ETFs on a platform or via a stockbroker account ETF trading on UK platforms rose strongly in 2012:  Ascentric saw ETF asset growth of 50% H1, 2013 Nucleus ETF flows doubled to £9.6m H1, 2013 ETF assets on Axa Elevate rose 25% year on year  Raymond James reports “exponential” ETF growth    Not all platforms provide intraday liquidity. Orders can be made once per day at single price How Do You Trade?  The 4 step trading process is as simple as buying a share Log in to the platform account Enter the EPIC or ISIN code for your ETF Input number of shares required Execute your order  Like share trading you can execute your trade in one of four ways Market order: trade at best price now Limit order: set a specified price Stop loss: set an automatic level to sell back Stop limit order: set price for purchase and sale at the outset What Happens Behind The Scenes?        ETF prices are supported by multiple Market Makers Market Makers are Financial institutions who:  Quote Bid & Ask prices during market hours  Within a given spread  For a given trading size (volume) More Market Makers means more competition over price More competition means tighter spreads (Bid / Ask) Typically Market Makers are attracted to highly traded ETFs It is important to look at the volume traded each day If your trade is larger than the quoted volume available you could have to pay more on the Ask price. EXAMPLE: LYXOR ETF (As of May, 2014) » An average of 2.8 MMs for Lyxor ETFs listed on NYSE Euronext » 19 firms registered as Market Maker for Lyxor ETF How Much Is Typically Traded? 1,000 900 800 Secondary Market 2013 ADV = USD 513 mn / EUR 372 mn 700 600 500 400 300 200 100 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Source: Lyxor Why ETFs Don’t Trade Like Shares At All ETFs Are Nothing Like Shares ETF trading is nothing like trading shares   Unlike a traditional share, ETF prices are not entirely driven by supply and demand for the ETF This is because ETFs are open-ended and new units can be created or redeemed in a Primary Market DEMAND RISES New ETF units are created Supply rises    DEMAND FALLS ETF units are redeemed Supply falls The value of an ETF is determined by the value of it’s Underlying Assets This value is known as the Net Asset Value (NAV): the value of all assets – liabilities The price that ETF units can be created or redeemed is the NAV per share (NAV / No. Units) Creating & Redeeming ETF Shares       SECONDARY MARKET CASH IFA BID PLATFORM ETF SHARES ASK PRIMARY MARKET MARKET MAKER CASH / SECURITIES ETF SHARES AUTHORISED PARTICIPANT CASH / SECURITIES  Creation and Redemption is conducted by exclusively by Authorised Participants (AP) An AP may be a Market Maker or any other large financial institution with a lot of buying power APs create new ETF units by exchanging cash or the Index’s underlying assets with the ETF provider In exchange, the ETF provider gives the AP a block of equally valued ETF shares The AP can then sell the ETF shares to generate a profit A ‘Redemption’ is essentially the same process in reverse All costs for Creation / Redemption are met by the AP and passed through to the Bid / Ask spread This means that ETF holders do not suffer trading costs as investors enter / exit the fund ETF SHARES  ETF PROVIDER What Does This Mean For You? This creation/redemption process has two major implications…   ETF liquidity is determined not by the ETF, but by the Underlying Securities that make up the ETF The price of an ETF trades in line the value of the Underlying Securities  If the ETF price is higher than the Underlying Assets, the AP can buy the Underlying Securities, create ETF units and sell them to the market for a profit  If the ETF price is lower than the Underlying Assets, the AP can buy ETF units, redeem them against the Underlying Assets and sell them to the market for a profit ETF TRADING AT A DISCOUNT ETF PRICE CONVERGES HIGHER ETF TRADING AT A PREMIUM ETF PRICE CONVERGES LOWER This creates a key distinction with closed-end funds where no one can create or redeem shares, and funds can trade at a large premium or discount to their NAV Creating A More Efficient Market   276 Lyxor ETFs are listed on 12 regulated exchanges A multi-broker-dealer model includes 51 Authorised Participants and 19 registered Market Makers More than 100 brokers in Europe 51 APs 19 Market Makers Lyxor Trade your order Provide OTC prices & create / redeem ETF units Offer Bid / Ask prices on Exchange Efficient pricing at every level Lower costs  More liquidity creates more efficient pricing, which reduces the spread you trade at Lower Trading Costs EURO STOXX 50 ETFs Spreads Japan ETFs Spreads 0.14% 0.60% 0.12% 0.50% JPN FP 0.10% XMJP GY IJPU LN 0.40% 0.08% 0.30% 0.06% 0.20% 0.04% 0.02% 0.10% MSE FP XESX GY EUN2 GY 0.00% 0.00% Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jan-12 MSCI USA ETFs Spreads 0.80% 0.70% 0.70% 0.60% 0.60% USA FP XMUS GY SSAM LN Jul-13 Jan-14 LEM FP XMEM GY IDEM LN 0.50% 0.40% 0.40% 0.30% 0.30% 0.20% 0.20% 0.10% 0.10% 0.00% 0.00% Jan-12 Jan-13 MSCI Emerging Markets ETFs Spreads 0.80% 0.50% Jul-12 Jul-12 Jan-13 Jul-13 Jan-14 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Lyxor ETFs Bid Offer spreads on major exposures are usually tighter or in line with competition Source: Lyxor In Summary: 3 Ways to Trade ETFs Secondary Market (Trade of existing ETF units) Exchange Primary Market (New units) Over The Counter (OTC) » On Exchange like a share » OTC through a broker » Most common for Advisers and investors » More common for professional investors trading large size » Trading during market hours » Inside and outside of market hours » Live pricing and trading » Live pricing and trading » OTC through a broker » Professionals only » Orders placed before cut-off » Execution at the Net Asset Value based on the index closing price » Transparent execution based on an official level Cost = Bid-Offer Spread Cost = Execution Price Cost = Creation / Redemption Fee + Broker Fee + Broker Fee + Broker Fee Tight Bid-Offer spreads and large on-exchange volumes are key for Advisers to reduce their ETF Trading costs The Primary Market setup is really important to ensure cost-efficiency and liquidity in the ETF Other Things To Think About Measuring Efficiency The most efficient ETF is one that lowers the overall cost of ownership   The Lyxor ETF Efficiency Indicator was created by Lyxor research to compare ETFs The ETF Indicator takes into account the 3 major factors affecting an ETFs true performance TRACKING DIFFERENCE* How does the ETF perform compared with its benchmark? TRACKING ERROR** How does the ETF behave compared with its benchmark? BID-ASK SPREAD*** What is the cost of buying and selling the ETF? 38.50 / 38.51 Performance gap - 1.65 x Tracking Error - bid-ask spread * Tracking Difference (in IOSCO terminology): Performance spread between the ETF and the benchmark index ** Liquidity Spread daily average of the first limit order spreads weighted by volumes for each listing place *** Tracking Error ( in IOSCO terminology): Volatility of the performance spread measures on a daily basis over a 1 year period Comparative ETF Performance The following table looks at the comparative efficiency of a selection of ETFs between March 28th, 2013 and March 31st 2014 Sources: Bloomberg and Lyxor. Past performance is not a reliable indicator of furture returns For each index, the methodology defines a peer group based on ETFs issued by providers belonging to the Top 20 ETF Issuers list, as defined by ETFGI, an independent research and consultancy firm. Each peer group includes the relevant Lyxor ETF share-class and the 4 largest ETF share-classes issued by other providers, representing a level of market-share of at least 5% on the relative index. ETF sizes are considered as an average of the Asset Under Management levels observed over the relevant time period. The performance of each ETF is determined by the change in Net Asset Value (NAV) between March 28th 2013 and March 31st 2014 included, with dividends reinvested. The observed performances are net of management fees. For indices not denominated in EUR, Lyxor converted each closing index value into EUR using the WM Reuters Forex Rate. General Risk of Lyxor ETF We recommend that investors read carefully the “risk factors” section of the Fund’s prospectus and the relevant Key Investor Information Document*. Any investment in these Funds involves certain risks, the main risks are as follows: » CAPITAL AT RISK: ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Underlying Index. Investors’ capital is fully at risk and investors may not get back the amount originally invested. » REPLICATION RISK: The fund objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication. » COUNTERPARTY RISK: Investors are exposed to risks resulting from the use of an OTC Swap with Societe Generale. In-line with UCITS guidelines, the exposure to Societe Generale cannot exceed 10% of the total fund assets. » UNDERLYING RISK: The Underlying Index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Underlying Index is calculated with reference to commodity futures contracts exposing the investor to a liquidity risk linked to costs such as cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks. » CURRENCY RISK: ETFs may be exposed to currency risk if the ETF is denominated in a currency different to that of the Underlying Index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns. » LIQIUIDITY RISK: Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Societe Generale. On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying Index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, Societe Generale or other market-maker systems; or an abnormal trading situation or event. Trading prices will only be available in normal market conditions. For more information regarding trading, please see the ‘Secondary Market’ section on page 28.  *The documentation (prospectus and Key Investor Information Documents) of the Funds are available upon request to Lyxor AM or on the website www.sglistedproducts.co.uk. The prospectus of Lyxor Index Fund is only available in English. Secondary Market  Lyxor Investors can buy or sell an ETF at any time in the Secondary Market prior to the Exercise Date on any regular LSE trading day from 8.00 am to 4.30pm. The value of the ETF will vary on an intraday basis.  Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Societe Generale. On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying Index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, Societe Generale or other market-maker systems; or an abnormal trading situation or event.  Cases in which there is no guarantee that liquidity will be available on the secondary market, and therefore normal market conditions may not prevail, include where: The Underlying Asset level is suspended or not tradable; There is a failure in the LSE, Societe Generale or other market maker systems; Abnormal trading conditions e.g. sudden and sharp volatility increase or lack of liquidity in the underlying. This means that an investor may find it difficult or impossible in certain circumstances to sell the ETF or may be offered a price less than they paid for it Disclaimer & Important Information This seminar is intended for educational purpose s only and as such is not a solicitation or recommendation to make an investment based on the contents of thi s presentation. Investors should be aware that investments can fall as well as rise and if there is any doubt over the suitability of a particular investment then you should seek independent advice. This document is issued in the U.K. by the London Branch of Societe Generale. Societe Generale is a French credit institution (bank) authorised by the Autorité de Contrôle Prudentiel et de resolution (the French Prudential Control Authority) and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. Although information contained herein is from sources believed to be reliable, Societe Generale makes no representation or warranty regarding the accuracy of any information. Any reproduction, disclosure or dissemination of these materials is prohibited. Lyxor and Lyxor ETF are names used by Societe Generale to promote the products of Lyxor Asset Management.Lyxor ETFs referred to in this document are open-ended mutual investment funds established under French Law and approved by the Autorité des Marchés Financiers (the French Financial Markets Authority). The products described within this document are not suitable for everyone. Investors’ capital is at risk. Investors should not deal in these product unless they understand their nature and the extent of their exposure to risk. The value of the products can go down as well as up and can be subject to volatility due to factors such as Level changes in the underlying instrument and interest rates. Prior to any in vestment in these products, investors should make their own appraisal of the risks from a financial, legal and tax perspective, without relying exclusively on the information provided by us, both in this document and the Pricing Supplement of the product available on the website www.sglistedproducts.co.uk. We recommend that investors consult their own independent professional advisors. Investors should note that holdings in these products will not be covered by the pro visions of the Financial Services Compensation Scheme, nor by any similar scheme. The securities can be neither offered in nor transferred to the United States. The tax statement is only a general guide. The tax treatment of investments will depend on an individual’s circumstances. If investors are in any doubt as to their tax position, they must consult with an appropriate professional tax adviser. This statement of the UK tax treatment of the product is based on our understanding of the laws and practice in force as of the date of this document and is subject to any changes in law and the interpretation and application thereof, which changes could be made with retroactive effect. For more information: see the Terms and Conditions available on our website www.sglistedproducts.co.uk Thank You Ben Thompson How to Trade ETFs Moderator Director, Business Development, & Listed Products Lyxor UK