Interview: Credit Suuisse to Undertake Major European ETF Expansion

Credit Suisse (CS) is undertaking a major expansion of its XMTCH ETF range. Paul Amery, editor of IndexUniverse.eu, talked to Oliver Schupp, head of beta solutions at the Swiss bank, about his firm’s plans.

IU.eu: Oliver, what is the thinking behind your bank’s decision to broaden its ETF range?

Schupp: We have an ETF business that launched in 2001, and is the dominant player in Switzerland, particularly through our SMI Swiss equity ETF. Up to now most of the investors have been Swiss, and most of the underlying indices are Swiss-based too.

Generally, we feel that there’s an increasing trend amongst investors for the separation of alpha and beta, and in particular there’s increasing demand for more sophisticated beta products. We define as beta as anything you can produce in a systematic way, so this can go a long way beyond traditional equity index investing. There’s a lot of innovation going on in this area, which we are part of. We took the decision late last year to expand our ETF range across Europe.

In summary, we plan to have 50-80 ETFs in our range by the end of the year, compared to our current eight funds.

(IU.eu note – Credit Suisse announced the first stage of the expansion of its ETF range on July 3, with the launch of sixteen new funds).

IU.eu: Where will these ETFs be domiciled, and what asset classes will you cover?

Schupp: We will continue to use Switzerland as the “manufacturing base” for the ETFs, but will launch our new fund range in Dublin, and all the funds will be UCITS-compliant.

We are focussing on an equity ETF range based upon the MSCI indices, and on a fixed income range based on the iBoxx indices. Once we’ve completed the core offering – what we would call the major building blocks for an institutional investor – we’ll start to add more exotic offerings, based upon the key areas of expertise within the bank. We have a very strong alternatives team, so you can expect us to develop ETFs that offer non-traditional payoffs or investment strategies. We hope to add ETFs that are based on algorithmic trading strategies as well, as well as funds offering leveraged and short exposure.

IU.eu: Where will the funds be listed?

Schupp: We are planning initial listings on the SIX Swiss exchange, followed by XETRA, NYSE Euronext, and the Borsa Italiana in Milan, and possibly London, as well. The Swiss listings will take place in early July, and we will conduct a pan-European launch of the funds at the end of the summer.

IU.eu: What replication method will your new ETFs use – physical or swap-based?

Schupp: We will use whatever method we feel is best for the end-investor, and we have no predetermined position on this. There are certain products which we’re planning to use where we cannot do without swaps. Ultimately, the decision on which replication method to use – whether you go with physical replication, and accept some tracking error to the index, or swap-based replication, where you accept some counterparty risk in return for zero tracking error – has to be decided on a case-by-case basis. We will carefully assess the options and try at all times to deliver the best possible solution for the investor.

For the first range of funds that we are launching in July, we are using physical replication.

IU.eu: Will you lend your ETFs’ securities, and how will revenues be split?

Schupp: We will have securities lending, and revenues will be split 50/50 between Credit Suisse and the funds, as is the market convention. Bank of New York will be the custodian of the new Dublin-based ETFs, but securities lending will be managed by a specialist desk within our investment bank.

IU.eu: You’ve recently conducted a big survey of investors. How would you characterise the key differences between the US and European ETF investor bases, and how will these change?

Schupp: The US ETF market has a much higher percentage of self-directed investors than Europe, although we expect this segment of the European investor base to grow quite quickly in the years ahead. Second, the US market has a greater proportion of hedge fund investors in ETFs, particularly in the more exotic products, such those with leverage, alternative weighting schemes, inverse funds, and so on.

In Europe, there has historically been a large structured products market for retail investors. ETFs could capture part of this, but may have to cover some of the same themes, including some of the more exotic payoff structures that structured products have typically offered, such as capital guarantees.

IU.eu: What are your plans in other asset classes, commodities, for example?

Schupp: We are looking at several possible structures for both physically-backed, and futures-backed commodity ETFs for phase two of our product launch. We hope to launch some of these by the end of the third quarter, including a gold-backed ETF, which we expect to be a major attraction, in view of the Credit Suisse name and our custody in Switzerland.

IU.eu: Do you have plans for expanding your ETF range outside Europe?

Schupp: Our initial plan is to focus on Europe, because that’s where we feel that the bank’s franchise carries the most weight and where we can create the greatest value for investors. But we’re also looking at cross-listing our ETFs in Hong Kong and Singapore, where the UCITS structure is recognised. We’re looking at Japan very actively, where up to now the ETF market has remained quite small. And we have a joint venture with ICBC in China, and are going to conduct some joint launches there, for Chinese investors. However, we have no plans to get involved in the US ETF market for the time being.

Original post