09.12.2017
By Rob Daly

Buy Side Embraces ETFs

Whether it for hedging or gaining exposure to a prohibitive expensive asset, the buy side’s appetite for exchange-traded products only continues to sharpen.

According to Ananth Madhavan, head of global research for ETFs and index investing at Blackrock, ETPs democratize access for investors.

“They started out pretty vanilla with large cap stocks and grew from there,” he said during a panel discussion during the NYU-SEC Dialogue on the Future of Exchange Traded Products.

Institutional and retail investors have further adopted the asset class for several functions, including cash equitization, hedging, asset allocations, and sector exposure as well as other things, Adam Gould, head of US equity derivatives trading at Tradeweb told Markets Media.

And as investors diversify their use of ETFs, ETF sponsors have expanded their offerings.

Gould estimates that fixed-income based ETFs represent 15% to 20% of the overall ETF market.

Adam Gould, Tradeweb

“However, close to 40% of our ETF trading activity in the U.S. is in fixed income, which speaks to our historical client base that has used Tradeweb for decades and is now embracing fixed income ETFs,” he added.

Beyond straight equity or fixed income ETFs, sponsors have developed a variety of index ETFs, real estate ETFs, smart beta ETFs, and triple-leveraged ETFs.

Even now the US Securities and Exchange continues to ruminate over whether the regulator should approve the first quadruple-leveraged ETF for the US market.

Fellow panelist Kathleen Moriarty, a partner at legal firm Arnold & Porter, noted that the underlying assets for ETFs are mostly limited to the sponsor’s imagination except for actual illiquid markets such as art or uranium.

“When someone comes to us to talk about a new product, they discuss the liquidity of the underlying assets and the potential arbitrage opportunities,” she said.

Since it launched its off-exchange trading in ETFs in the US in January 2016, Tradeweb has seen more than $57 billion in notional traded via the venue operator’s request-for-quote service by more than 100 participants and 22 dealers.

“As demand and trading activity have increased, we’re providing a way that allows clients to get really good pricing in an RFQ protocol that they’re used to,” said Gould. “I think our growth shows they’re getting efficient access to the ETF marketplace via RFQ, and are extremely comfortable in their ability to get in and out of ETF positions on Tradeweb.”

He estimates that half of those who use RFQ service have traded fixed income on one of Tradeweb’s other platforms before while the other half are new comers.

“We have dramatically expanded our customer base to equity-focused money managers such as registered investment advisors, ETF fund of funds, and other equity portfolio managers and traders who are using Tradeweb RFQ offerings for the first time,” he added.

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