Lyxor ETF, the power to perform in any market

It entered the ETF business during the sector’s infancy in 2001, building it up to cover 170 indices today, with $41 Bn in assets under management. It is now the third most prominent player in Europe and the sixth on the global stage.

“We are certainly a historical player, developing a range covering the basic indices in the beginning, concentrating on equities until 2005.

“Since 2005, we have progressively introduced fixed income and commodities to reach a stage where we have all the major asset classes and areas of the world covered,” explains Arnaud Llinas, global head of Lyxor’s ETF and indexing business. “After just over 12 years of development we believe we now have a comprehensive toolbox for investors to allocate assets through.”

For Mr Llinas, what sets the Lyxor ETF proposition apart from its competitors is not only the benefits usually associated with investing using an ETF, which include transparency, liquidity and cost efficiency, but also the way in which the company itself operates.

He explains: “A client once told me that the key reasons he chose an ETF was because he could get his money back easily if he needed it, and because it delivers exactly what is written in the prospectus. The third benefit is it is very cheap, with management fees globally at below 30bps per year. However, it is important to stress that investors should consider the full cost of owning an ETF, which means looking at tracking efficiency and the Bid / Ask spread as well.

“In addition to that, Lyxor has developed its quality charter with the aim of communicating our principles in terms of fund management, risk and the organisation of the environment around us. First, in terms of asset management principles, we want to be as transparent as possible so we have worked on our website over the past few years so it displays exactly how our funds are structured, what is in each fund, how we use securities lending and how we use derivatives. We want to explain in detail how all the funds work.”

“Second, we have worked to establish a band of authorised participants – or market makers – that is big enough to provide liquidity at any time. That is a key differentiator for me as, while it is not complicated to have a listed index fund, it is more complex to have a fund that is animated by several brokers who can make sure that at any point you can find a price on the bid or the offer side. We are committed to providing that.”

At the moment Lyxor has 49 authorised participants, including brokers, investment banks or electronic market makers who are able to boost liquidity on the primary market before distributing the funds on the secondary market. Further, it prides itself on its clarity in reporting and in communicating details such as the replication methods it uses.

“In terms of those replication methods, historically we were instrumental in the development of and are still strong believers in synthetic replication, especially for complex indices, such as in the emerging markets, where it definitely adds value for investors.

Depending on market conditions and investor appetite we have also developed a physical range where it makes sense, where the synthetic method does not bring enough value. In this method we use securities lending where it is appropriate, except on the fixed income side.

“Meanwhile, we do not use the sampling method, which is a statistical technique. We consider the trade-off between risk and return. As our primary goal is providing products that perfectly track the index, we have to make sure the tracking error is very small. We do not want to get to a situation where the index and the ETF diverge significantly.”

Overall, Mr Llinas believes the strength of the proposition will help secure market share as a growing number of retail investors look for cost-effective investment options following the retail distribution review in the UK and other regulatory and legislative changes across the rest of Europe. With a broad trend of advisers moving from a commission-based to fees-based remuneration model, ETFs are quickly becoming a more-often-used option for canny advisers and their clients.

“Our business is still mainly institutional, but we anticipate the retail aspect will grow,” Mr Llinas confirms. “While I would estimate that at the moment retail clients make up less than 10 per cent of total business, if you look at the US market and the recent regulatory change in Europe, we would expect the proportion to rise to 50 per cent one day. It will be a slow process, but it is a reality that will come to pass eventually.”

As for the future of Lyxor ETF in general, Mr Llinas anticipates further development on the fixed income side of the business, as well as in some other asset classes to ensure breadth and depth of coverage for investors. Indeed, the company launched further fixed income funds this year, with plans to perhaps develop the range to include countries outside Europe. Meanwhile, on the equity side there is also an ambition to extend the global reach of the offer, including in depth exposure to emerging market countries as well as frontier markets for which the underlying liquidity is good enough. There is also a real interest in pursuing “smart beta” vehicles.

“For us smart beta means the ability to propose indices that are not weighted in the classic way, which is to say by market capitalisation or country, but rather are weighted by risk,” Mr Llinas explains. “We are proposing new ways of allocating risk budgets in a basket of assets. This initiative is an innovative idea for the market and it is as yet unclear whether it will be a massive trend and end up replacing traditional market-cap weighted indices, but it is definitely a centre of interest for clients.”

Certainly there have been significant inflows to date in the strategies Lyxor has already launched, including a Euro Stoxx 50 equal risk contribution fund, as well as a quality income index based on deep analysis of balance sheets and income to provide reduced levels of volatility. This quality income strategy was originally launched on a universe of global stocks (SGQI). However, based on the success of SGQI, the same strategy has now also been applied to European stocks (SGQE).

Arnaud Llinas, Global Head of Lyxor’s ETF and Index Business