Already providing the broadest choice of ETF derivatives in Europe, Eurex has recently introduced another five new ETF options. We discussed the interesting market opportunities these options will provide with Michael Delew, Director, Capital Markets, at Wisdom Tree, the leading New York-based ETF sponsor and asset manager, and Matthew Riley, Equity & Index Sales EMEA at Eurex.
Michael, what trends do we currently see in the ETF market?
Three themes in the exchange-traded fund (ETF) space which have been very apparent this year include growing demand for ESG, the broad adoption of digital asset exchange-traded products (ETPs), and the continued rise of thematic investing.
Thematic investing, in particular, has played out in a number of ways, with investors looking for multiple avenues to access this long-term trend. As might be expected, this has resulted in large inflows into equity products that track themes such as electronic vehicle (EV) adoption, but it also affects the raw materials that play a part in the story. We’ve seen this in the form of interest in our products like WisdomTree Copper (COPA) and WisdomTree Nickel (NICK), which allow investors to easily access exposure to these metals in an ETP wrapper. We see increasing demand for these and other thematic commodities.
We think that ETPs will be the primary way that investors look for this exposure, as it provides an easily tradeable and accessible wrapper at low cost. It is also transparent and provides direct access for investors who might otherwise have to deal with the difficulties of trading futures or the custody of physical commodities.
Matthew, what is driving this demand for commodities and commodity ETPs in particular?
The global rebound in trade and industrial production that will likely continue as the global economy recovers from the pandemic is expected to continue to push prices higher. The recent all-time high in copper bears witness to this.
In addition to the practicalities around physically delivered commodity futures and options that Michael mentioned above, there are also many equity funds which would previously have taken exposure to the commodities through mining stocks, but are now seeking a more direct exposure to the commodity itself.
Michael, how can customers best implement them in their trading strategies?
The most obvious benefit of options is that they give investors the ability to use more advanced trading strategies and make returns when the market goes up or down. They can also play a very important role in providing downside protection and hedging. Specifically, options on an ETP allow investors who may be holding that product to hedge more effectively, rather than use other methods which may not represent the same exposure as the ETP.
Matthew, anything to add to the above?
I think it is also worth noting that ETPs have no inherent yield. While an equity index ETF will have a dividend ‘carry’ associated with it, an ETP on a commodity has no such income no dividend, so options are an excellent way of creating yield by selling calls and/or puts around your position.
Matthew, are regulatory requirements playing a role in this market segment?
With UCITS regulated funds now accounting for over 60 percent of all assets under management in Europe, the UCITS eligibility of our ETP options range is one of the key drivers of volume growth. The benefits of price transparency and liquidity also extend beyond the letter of the regulations to give investors comfort in the full spectrum of cross asset investments now available at Eurex.
Michael, where do you expect to see future areas of growth in ETFs and ETF options?
We expect investors to continue to be interested in trends and look for ETF issuers to provide access to new areas of innovation and growth. One of the best examples of this is the success of digital asset ETPs this year, and the institutional adoption of the asset class. We anticipate demand for this asset class to continue to grow and, as it does, more sophisticated investors moving into the space will look for options on these ETPs as ways to manage risk and hedge positions.
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