A review of exchange-traded fund activity by BNY Mellon, the global financial services provider, indicates that ETF issuers are favouring the launch of alternatives- and derivatives-based funds this year.
Alternatives- and derivatives based ETFs have accounted for a quarter of ETF launches this year according to BNY Mellon.
Based on a review of products serviced by BNY Mellon, alternatives- and derivatives-based ETFs accounted for 25% of new funds in the first nine months of 2015, continuing the trend seen in 2014.
There are a number of factors that are driving the demand for these funds. “Growing interest from registered investment advisors looking for downside protection appears to be an important driver of the growth of alternatives-based ETFs,” said Steve Cook, business executive, structured product services at BNY Mellon. “In addition the possibility of rising interest rates has advisors looking for alternatives to fixed income investments. The structure and tax efficiencies of ETFs enhance the attractiveness of this type of investment.”
Within the alternatives- and derivatives-based space, short and leveraged (S&L) products have been in great demand this year – against a backdrop of increased market volatility. According to ETFGI, an ETF industry consultant, S&L ETPs saw $7.5bn of net inflows globally during the month of September alone. These products provide investors with an alternative to pure derivative based strategies to hedge portfolio positioning or implement tactical views on market direction. Investor demand for S&L products tracking oil prices, and the number of new product launches from issuers this year, is a prime example.
The strength of the alternatives- and derivatives-based ETFs can also be explained by structural drivers of demand. Many smaller institutional investors are restricted from explicitly using derivatives; however, as ETFs and ETPs are often treated as equity instruments, and an investor can’t lose more than their original investment, they provide an accessible means of derivative-like exposure. Banks have also become more constrained in the derivatives market due to capital and liquidity requirements and this cost is being passed to the purchasers of futures and forwards, making ETF proxies a more compelling substitute.
Alongside alternatives- and derivatives-based funds, smart beta ETFs accounted for 12.5% of new launches, a significant improvement on 2014 when they accounted for 4.4% of BNY Mellon’s new ETF strategies. Fixed income accounted for 6.3%, and actively managed ETFs accounted for 5%. The number of actively managed ETFs launched in 2015 declined to 5% from 25% in 2014.
“We attribute the lower level of actively managed launches in 2015 to pending regulatory rulings on this segment of the ETF market,” said Cook. “Many firms with these active offerings in the pipeline are awaiting the outcomes on these rulings before moving ahead. We expect a significant upswing in actively managed ETF launches once the new regulations become clear.”