BlackRock has teamed up with Euroclear Bank, a Belgian post-trade group, to launch the first iShares exchange traded fund (ETF) with an international security structure.
Unlike other cross-exchange listed ETFs in Europe, the product can be issued and settled for the first time in an international central security depositary (CSD) in which it is traded.
By using a single European settlement location, the ETF will use a new global structure, which is aimed to ease cross-border processing, improve trading liquidity and considerably lower transaction costs for investors.
Euroclear’s chief executive officer, Tim Howell, said trading ETFs across borders in Europe is currently an “inefficient, complex and labour-intensive” process.
“This structural shift, that clearly recognises ETFs as internationally-traded securities, will further broaden investor appeal and provide the optimal post-trade arrangements. This will enable ETFs to continue their rapid rate of growth in Europe,” he added.
The new structure is designed to lower the cost of owning ETFs by reducing international transaction charges. All ETFs are currently issued and traded in one or more national stock exchanges; this set-up negates the need for multiple listings.
BlackRock’s European ETF will be the first to launch under the new structure in the coming months, with further funds added later. It is expected to track a European benchmark, with additional details due closer to its release.
This innovative product will undeniably improve access to ETFs and make cross-border trading easier for investors if widely adopted.
A single settlement location for ETFs has been in place for years in the US and it provides efficiency at all levels of trading, clearing and settlement; it has arguably added transparency to the products in the country. Simplifying the issuance structure and post-trade environment in the European ETF market should make it easier for liquidity providers to service clients.
ETFs are already considered a low-cost option for investing in certain markets so lowering the cost even further will make the investments become a more attractive investment to hold in a portfolio for investors and advisers alike.
Although charges for the new ETF are currently unavailable, a typical iShares FTSE 100 ETF has a total expense ratio of 0.4 per cent. If iShares can pull off an even lower cost, it would be a coup for the firm; despite being one of the bigger players in the market, the firm has come under pressure recently since its charges are typically higher than peers like Vanguard.
Liquidity is one of the biggest concerns for ETF investors, so a new pilot scheme that could potentially ease it can only be seen as a positive move.