Last month exchange-traded fund provider Lyxor announced that it was slashing the fees on a number of its core London-listed UK and US bond ETFs. The move was the latest statement of intent from the Paris-headquartered firm, which had one of its best years in 2015, and is now looking to build its investor base and launch 25 new products this year.
Arnaud Llinas, global head of ETFs and indexing at Lyxor.
The firm has triumphed in recent years despite taking much flak (largely generated by the industry itself) in 2011 for its then-heavy reliance on so-called synthetic or swap-based ETFs. It saw its market share drop from second largest in Europe to third as it was overtaken by Deutsche Asset Management’s db X-trackers platform in 2011 and it then saw BlackRock’s iShares move out of competitive distance with its acquisition of Credit Suisse’s ETF business in 2013.
However, it seems to have now turned a corner and is fast emerging as a strong alternative and credible global challenger to the industry’s giants.
Last year alone the European ETF and exchange-traded product industry gathered $82 billion in net new assets, of this Lyxor took 12% of the net inflows amounting to $9.8 billion and now has assets of $52 billion, or a 10.3% market share. Its closest rival, Deutsche’s db X-trackers, has assets of $61 billion and 12.1% market share, according to data from industry consultants ETFGI.
This year marks the provider’s 15th anniversary and it expects its success to continue. Rebecca Hampson, associate editor at ETF Strategy talks to Arnaud Llinas, global head of ETFs and indexing at Lyxor about what 2016 holds and why it is now pushing the fixed income range.
Rebecca Hampson: You had a good year in 2015. What do you put this down to?
Arnaud Llinas: Over the last five years the big players in the market, iShares, db X-trackers and Lyxor hadn’t really seen their market share rise because of new players entering the market. But this changed this year and we raised our market share.
Our net new assets were boosted by flows into European equities and this is an area we are strong in. [According to data from Lyxor, out of the €72 billion of net new assets into Europe €38 billion flowed into European equities alone.]
We have several big European equity ETFs, such as the EuroSTOXX 50, which is the biggest [EuroSTOXX 50] ETF globally. We also offer the CAC 40, IBEX 35 and FTSE MIB, which are the largest in Europe. So in some ways we have benefited more than others from this investor appetite for equities. When this is compared to 2014, when we saw US equities boom, the contrast is significant.
RH: Has the European market, and consequently ETF providers, benefited from the entrance of new investors or has it just seen more money enter from existing investors?
AL: Gradually we have attracted more clients from around the world. We used to sell ETFs to mainly asset managers, but now we are selling to pension funds, insurance companies, private banks and wealth managers, who are all very keen on ETFs. This is because of several factors; the products are low cost, there are regulatory pressures in individual sectors and there is a lot of media coverage on robo-advisors. The latter of which has helped the retail market become more aware of ETFs.
RH: You recently cut the price of your fixed income ETFs. What was the reasoning behind this?
AL: We cut the total expense ratios (TERs) on our Gilt and Treasury ETFs and US & UK Investment Grade corporate bond ETFs because in such a low yield environment costs really matter for investors. These four ETFs are staple exposures for UK investors, and this is where we want to really grow our business this year. We want them to have the most appealing and competitive product.
[Investors can obtain exposure to gilts and treasuries from as little as 0.07% and UK and US corporate bonds from 0.09%.]
Quite often we see products that are 50bps off the return of the index over a two year investment, and therefore it’s not an attractive product because the fees are clearly too high.
The TER on our core fixed income exposures are lower than many of our equity range and we have also lowered the TER on our cash products with some as low as 5bps.
RH: Who do you anticipate will buy these ETFs?
AL: We expect to see portfolio managers who are focusing on asset allocation buying these fixed income products because they are the basic core building blocks for investor portfolios and asset allocation. In addition to this we also expect to see pension funds and insurance houses buying these products.
We only lowered the price a matter of weeks ago so we can’t yet see what the inflows are doing, but we have seen a lot of interest already.
RH: What separates you from your competitors?
AL: We are a strong alternative to the very big players. We have a comprehensive offering of products [240] and in particular a lot of them are very liquid. They have liquidity on exchange and good performance, meaning they track well and trade efficiently. This is important for investors who are concerned with keeping the overall cost of ownership to a minimum.
RH: Lyxor was hit hard by the industry battle over synthetic vs. physical replication. What do you credit your survival to?
AL: We celebrate 15 years in the industry in the next few weeks and this expertise has meant we have been able to do things well that perhaps other providers have not. We are able to access hard-to-access markets. Our emerging market range has been around for a while. For example, we launched our China ETF in 2005.
We haven’t shied away from synthetic products and will use them when they are the right product to use. Professional investors understand this. One type of replication does not fit all. For example, when you access corporate bonds or high-yield indexes, being able to use the derivatives market is a very powerful tool and helps to make the tracking of these ETFs extremely good.
RH: Any launches to look out for this year?
AL: We intend to launch 25 products this year with a focus on smart beta and fixed income, where we plan on moving outside the European focus and looking at US high-yield and emerging markets. We will also, of course, continue to complete our equity offering with global access.
RH: What do you anticipate for 2016?
AL: We believe that Lyxor can be a global challenger and we have plans to push out of Europe into Asia, where the UCITS label is in demand. We also expect to see strong growth in the region of 15% for the market this year. At a minimum we expect to see the European ETF market realise net new assets of around €50bn.