How To Choose Amongst ETFs: Looking Beyond Top-Line Performance Matt Hougan, Moderator Global Head of Editorial IndexUniverse.eu Stephan Doran, Panelist Investment Manager HSBC Global Asset Management Valerie Baudson, Panelist Managing Director Amundi ETF Chris Plomitzer, Panelist Vice President, Head of ETF Sales Germany, Austria, Luxembourg and Swtizerland UniCredit Corporate & Investment Banking How To Choose Amongst ETFs: Looking Beyond Top-Line Performance Valerie Baudson, Panelist Managing Director Amundi ETF How to Best Select an ETF? The offer is very broad, but all ETFs are not alike and it is important to carefully look at the main performance drivers to properly choose an ETF  The management fee level / TERs Need to be charged per annum, all tax inclusive and maximum COST  The quality of the bid/ask spreads > liquidity Has consequences on the prices, thus on the return/performance  The underlying index type Total Return Indices Price Return Indices QUALITY  The replication type Swap-based / synthetic replication Physical replication Quality Products, Tracking Total Return Indices To participate fully in the market you are tracking, it is important to use Total Return indices to seek optimal exposure and lower tracking error. In the case of Amundi ETFs:  Every day, each dividend/coupon paid out by an index constituent is immediately reinvested in the index  The level of dividends reinvested by the fund can be easily measured against the reference index  No cash in the funds AND NOT:  Some ETFs track Price Return indices: – Dividends are kept in cash in the fund. During the dividend season cash remains unexposed to the index (possible higher tracking error) – The level of dividends paid cannot be measured against the reference index 3 Ways to Trade ETFs Advantage: At the bid/ask spread, as a simple stock Execution in the order book, during market hours -Simple -Order types identical to stocks Beware: -Within the limits of the order book Avantage: OTC, via your usual intermediary/broker -Instantaneous execution Beware: OTC through a market maker, during the trading hours -Put market makers in competition Avantage: At the close of the fund’s NAV Order taken at NAV through a creation/redemption process -No spread -Very low creation fees Beware: -Cut-off times, minimum sizes Synthetic Replication and Quality Signatures For swap-based ETFs, know your counterparty risk: • Counterparty Risk Max: The marked-to-market to the swap is the only counterparty risk; it is limited to 10% max of the NAV of each ETF • Swap Counterparty Rating: The swaps are agreed on with the Crédit Agricole group (AA- rating) or Société Générale (A+ rating) • Collateral Basket: The 90 % remaining (substitute basket) of all equity AMUNDI ETF are reinvested in European equities ETF The ETF’s AuM (equity or fixedincome) Swap counterparty pays the performance of the index (on 100 % of the assets of the fund) to the fund Swap Swap counterpaty The ETF’s benchmark index (TR) The swap counterparty = Crédit Agricole CIB for Equity ETFs = Société Générale for Fixed Income ETFs How To Choose Amongst ETFs: Looking Beyond Top-Line Performance Stephan Doran, Panelist Investment Manager HSBC Global Asset Management Introduction •Absolute Return Strategy •Multi asset – Fixed Income, Equity, Commodities and Alternatives •Blended architecture – allocate to active managers and invest directly •$2.5 billion in the strategy •Using in ETFs since 2002 ETFs or Active managers •ETFs are preferred in “Efficient Markets” - index guaranteed • Large cap • Liquid and transparent indices • Tactical asset allocation •Active managers for less efficient markets – index rarely achieved • Small caps/Frontier markets • Complex markets (credit and non-spot commodities) • Active strategies (hedge funds) How do we select ETFs? •Due diligence - same process as active manager •Suitability - tax, domicile, structure, tracking error, costs •Underlying index liquidity •Depth of ETF liquidity Spot the difference Oil •Spot price up 43% Mar 05 –Sept 07 •Investors buy futures, not barrels •Oil ETF up 3% •Contango caused negative roll yield of 13.7% •per annum!!! Leveraged ETFs Gold •Gold was up 10% between March 2008 and March 2010 •Levered gold ETF was down 4% •Two times products have not delivered expected outcome •Index being tracked must have a clear and consistent delta Cheap to hold, expensive to trade? Intraday Average Spreads of FTSE 100 ETF (%) 0.75 0.70 0.65 Full cost of ETFs •TER can be the tip of the iceberg 0.60 0.55 0.50 •Spreads can be as much as TER 0.45 0.40 0.35 0.30 •Round trip costs 0.25 0.20 0.15 0.10 0.05 0.00 ETF 1 ETF 2 ETF 3 ETF 4 •Understanding the execution options can significantly reduce costs How To Choose Amongst ETFs: Looking Beyond Top-Line Performance Chris Plomitzer, Panelist Vice President, Head of ETF Sales Germany, Austria, Luxembourg and Swtizerland UniCredit Corporate & Investment Banking ETF Family Underlying Asset class ETF & ETC Equities Commodities Blue Chip ETC Index ETF on Indices eb.rexx Government ETF Exotic ETC Sector Certificates on Indices iBoxx Sovereigns ETF Sectors ETC Single Commodity Strategies Currencies iTraxx Currencies Money Market EuroMTS ETF Long/Short/Leveraged Full/ Swap Credit Corporate Bond ETF Strategies Replication Fixed Income Futures Long Swap Full/Swap Swap Trading at NAV-Opening Hours/ForexHedge/Closing Time ETF Market Making – NAV ORDERS Product 2:00 4:00 5:00 5:30 6:30 7:00 7:30 8:30 9:00 11:00 12:00 12:30 14:30 15:00 15:30 17:00 17:30 20:00 20:30 21:00 22:00 22:30 Lyxor EU ST50 iShares S&P 500 Lyxor ETF India dbx FTSE Xinhua 25 iShares Nasdaq iShares UK Gilt All Stock Lyxor MSCI Brazil Lyxor Corp Bond iShares USD Corp Bond EQQQ Underlying Cash Markets 16 WM-Reuters Fixing Forex NAV-Fixing (CET) 0:00 ETFs Liquidity: The Market Makers Role ETF Market Making – NAV ORDERS The Market Maker ensures liquidity even when the underlying markets are closed.  Example: the Chinese New Year.  The Hong Kong market was closed between the 26th and the 28th of January.  The Taiwan stock exchange was closed for a week starting from the 22nd to the 29th of January.  Korea, Singapore and Malaysia were closed on the 26th and the 27th of January.  During this period, Lyxor did not accept creations or redemptions on Asian ETFs.  However, the Market Maker continued to quote these ETFs giving the possibility to the investors to trade them. This is a peculiarity of ETFs that significantly differentiate them from actively managed Funds.  During the whole time the underlying markets were closed and actively managed issuers did not accept any creation or redemption – hence the risk was fully shifted towards market makers  Even when underlying markets are closed, market makers secure liquidity on exchange and offer prices OTC. Those are significant advantages against actively managed funds. 17 How To Choose Amongst ETFs: Looking Beyond Top-Line Performance Matt Hougan, Moderator Global Head of Editorial IndexUniverse.eu Stephan Doran, Panelist Investment Manager HSBC Global Asset Management Valerie Baudson, Panelist Managing Director Amundi ETF Chris Plomitzer, Panelist Vice President, Head of ETF Sales Germany, Austria, Luxembourg and Swtizerland UniCredit Corporate & Investment Banking