Section 2 - FTSE

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strategies and FTSE Group has expanded its range of short and leveraged indices; FTSE’s 100 Short Index serves as the basis for DB x-trackers FTSE 100 Short ETF, as part of its short ETFs range.The new indices allow money managers to exploit volatility in the UK market by allowing investors to go short the market or gear up. The indices will serve as the basis for ETFs, benchmarks and other index-linked financial products and are an extension of FTSE Group’s range of investment strategy indices that are designed to provide asset managers with strategic investment tools. Another area where indices are making headway is in the emerging and frontier markets such as Africa and the Middle East. Emerging and frontier markets are areas in which many index providers have a growing presence. This divergence from the developed world towards the new geographies reflects the eagerness of investors to ensure they can achieve a well diversified portfolio while, at the same time, having the confidence of being able to rely on a transparent methodology they can track. ETF providers are no strangers to this fact.As a result, there has been an explosion of country based ETFs from the BRIC countries down to the Sub Saharan region of Africa and across the Middle East, such as the Lyxor ETF based on the FTSE Coast Kuwait 40 Index. This move also ties in well with the increase in the number of stock exchanges around the world that are bidding to create new regional and partner indices in order to gain market exposure to an international investment community and which provide the underlying infrastructure for such ETFs. As a global index provider, FTSE Group works with over 18 stock exchanges across the world to provide indices created to enhance growing economies, such as that achieved with the JSE (South Africa) and ATHEX (Greece). Such partnerships are a perfect example of the potential successes from combining domestic know-how with international distribution to bring innovative product to market. Simultaneously amid the tumultuous conditions the industry is faced with, index providers are now more than ever a much needed auxiliary to banks’ in-house quant teams who choose not to solely manage and calculate proprietary indices. Increased collaboration between these two parties can prove mutually beneficial, with banks profiting from credible products based on objective third party run indices and the index provider gaining new business opportunities. These trends have largely been driven by the growing requirement among investment firms for transparency, risk management and cost efficiency. Moreover, it is also increasingly important these days within the industry to harness real and focused expertise. Equally, the world of indexing has moved on considerably and over the past few years at FTSE Group, there has been a wave of index innovation from the introduction of the much lauded Sharia compliant indices and infrastructure indices to the creation of indices that cover issues such as responsible investment. Most recently there has been significant development undertaken on environmental technology indices. In combination, all of F T S E G L O B A L M A R K E T S • J A N U A R Y / F E B R U A R Y 2 0 0 9 Imogen Dillon Hatcher, executive director, FTSE Group. Photograph kindly supplied by FTSE Group, December 2008. these are ripe for and have formed the basis of structured products such as ETFs. The creation of new ways to benchmark has not stopped at existing asset classes either. Alternative asset classes such as real estate investment trusts (REITs) and hedge fund of funds (HFoF) have also taken off and these have gone some way to provide investors with greater choice over and above the traditional equity class. Indices, ETFs and the future With transparency being the buzzword of the moment, it is clear that both index and ETF providers must work together to ensure investors are not only served but also kept informed and educated. The use of open and transparent rules driven methodology in addition to independent index committees (made up of market practitioners) is vital for a healthy and most importantly tradable index, a philosophy which FTSE Group applies across its 120,000 indices. With a migration towards passive management and a resurgence of portfolio rebalancing, it is evident that indexing is a first choice for investors looking for that long term investment in a transparent, risk managed and cost effective way. The ETF market, in common with all areas of the financial arena, becomes ever more competitive and in our view is nowhere near saturation. ETF players are ensuring healthy competition through increasing innovation, creating original products driven by investor demand. They will continue to add credibility to this investment segment and emphasise the benefits of a ready-made diversification of index tracking with the ease and flexibility of trading shares. 81
ETCs GAIN AS COMMODITIES REMAIN POPULAR 82 ETCs gain as commodities remain popular In an inaugural regular commentary on the rise of the exchange traded fund (ETF) industry, we look at the key trends in exchange traded commodities (ETCs) as well as ETFs through the recent holiday period. Not surprisingly, given the continued volatility in global equities in recent months, investors continued to build positions in ETCs, particularly in gold and oil. While traditional equity based ETFs have been relatively quiet, and equity based ETFs have been impacted by some of the outflows suffered by equity based mutual funds and hedge funds, some market watchers think that by and large, equity ETFs have maintained inflows, though overall assets held in ETFs have fallen. What are likely to be the key trends in the first half of 2009? EXCHANGE TRADED COMMODITIES (ETCs) have reportedly begun the New Year on a upbeat note as investor sentiment continued to favour commodities, cash and foreign exchange over traditional equities as 2008 drew to a close. Specialist ETC and ETF provider ETF Securities, says it has seen continued strong inflows into ETCs since early November last year. By mid December the firm reported that $323m had flowed into a range of ETCs including precious metals, energy and industrial metals, comprising inflows of $403m into long ETCs including Classic, Forward and Leveraged ETCs and outflows of $80m from Short ETCs. Oil inflows continue to be strong and continued to dominate the ETC sector. Inflows into long oil ETCs rose by $218m in late October and early November last year reversing the strong outflows during August and September. Over the period, energy ETCs saw some $225m of inflows, compared with the outflow of some $30m from short energy ETCs, say ETF Securities analysts, with energy ETCs contributed 53% to the total net long position added to ETCs. Physical metals, such as gold and platinum recorded similar tends, while industrial metal ETCs also saw some smaller scale inflow activity. In total, $13m of long industrial metal ETCs were added. However the largest trades were seen in outflows of short industrial metal ETCs. Short industrial metal ETCs experienced outflows of $25m. This equates to a net long position of $38m being added to industrial metals, says the firm. The driving factors behind commodity prices in 2008 included increasing demand, particularly from China and other emerging nations, numerous supply related issues, and the global financial crisis which caused a sell off in virtually every asset class. Over the past 12 months, gold appears to have been the standout performer with a return of approximately 2% in US Dollars, 37% in sterling (though that percentage will have risen as the British currency continues to dive) and 18% in Euros. Over the longer term, commodities have outperformed almost every other asset class, with energy and precious metals some of the top performers over the last five and ten years. Grains and precious metals were also featured among the top performers over the past three years. According to Nik Bienkowski, chief operating officer (COO), at ETF Securities: "Inflows into ETCs over the past five weeks shows that many investors are still interested in a wide range of commodities despite the recent pull back as a result of the weakening economy. $323m of inflows into ETCs over five weeks is a good achievement in any market. … With oil having fallen from $147 per barrel to around $45 per barrel, many investors now see this as a long term buying opportunity. While demand for oil has fallen, longer term supply issues still exist such as falling production, falling reserves and a shortage of skilled workers. Regardless of an investor's view, ETF Securities offers both long and short ETCs which enable investors to profit in a rising or falling market.” Barclays Global Investors (BGI), citing data verified up to the end of November 2008 noted a largely positive 11 month period, and posited an improved outlook for ETFs through 2009. In the current market turmoil investors are becoming even more concerned about counterparty risk, transparency, liquidity and the use of derivatives and structured products, notes Deborah Fuhr in a recent release. At the end of November 2008 the ETFs industry had 1,539 ETFs with 2,580 listings, assets of $633.83bn, managed by 86 managers on 42 exchanges around the world, with ETFs increasing overall by 31% with over 414 new launches through 2008. However, Fuhr notes that assets fell by 20.4%, though she says it is less than the 43.80% fall in the MSCI World index in US dollar terms. Moreover, the use of ETFs to implement exposure to cash, fixed income, commodities and equity indices is becoming more popular, she notes. Fuhr also points out that the use of ETFs is likely to increase significantly by independent financial advisers (IFAs) in the UK based on the regulatory proposals outlined in late November last year in the Retail Distribution Review (RDR) feedback statement by the UK’s Financial Services Authority (FSA), the official regulator. Fuhr adds that there are plans extant to launch some 570 new ETFs in train, of which the bulk are in the United States (469) and the rest in Europe. J A N U A R Y / F E B R U A R Y 2 0 0 9 • F T S E G L O B A L M A R K E T S
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