By Paul Amery
Two things struck me during the interview I conducted on Monday with Farley Thomas, global head of wholesale business at HSBC’s (HBC) asset management division.
The first thing that surprised me about HSBC’s strategy was the bank’s decision to focus on the best-known indices and the areas of the market where ETF assets are already overwhelmingly concentrated. Up to now, the entrance of new issuers into the ETF market has often been accompanied by a decision to promote a new set of indices, a new type of fund structure or an innovation of one form or another.
With its decision to focus on the best-known indices in the ETF market (the FTSE 100, CAC 40 and DJ Euro Stoxx 50 are its first three planned launches), HSBC is taking on the established incumbents directly. Farley Thomas argues that the European ETF market has scope to grow a lot further, so his bank’s focus is on attracting new inflows rather than taking business away from existing issuers. However, HSBC will still need to convince each marginal buyer that he or she should buy the HSBC ETF rather than the iShares, db x-trackers, Lyxor or Source equivalent. With HSBC’s FTSE 100 ETF fees priced five basis points per annum lower than the other replication-based ETF (that of iShares), but five basis points more than the swap-based funds offered by the three other issuers, this will be an interesting battle to follow (given that there isn’t much to separate the funds on fees alone).
As I pointed out in my last blog, in which I quoted a recent iShares report, there are at least three other factors that should influence a buyer’s decision when choosing an ETF. A fund’s return (the ability of an ETF to outperform its benchmark in some cases), tracking ability and trading liquidity are probably more important than the headline fee scale in assessing an ETF’s relative attractiveness.
As the ability to generate additional returns through securities lending is accepted as an important component of the ETF management process, HSBC can draw upon the economies of scale that come from being associated with a large asset management business. The bank is clearly targeting iShares (and Credit Suisse) when it says that it will pass on more than the standard 50% of such revenues to fund investors.
But another thing that could influence an investor’s decision is of course the brand name of the ETF, and Thomas’s comments on this subject also caught my attention during the interview. HSBC’s decision to use its own name as the ETF promoter is a real departure from established practice, since up to now most ETF issuers have chosen a business name distinct from the parent bank or banks. Using another brand name can have obvious advantages – for example, promoting a distinct identity for the ETF business, making it easier for the business to be sold as a whole, avoiding cannibalisation of higher-margin fund management businesses, and even avoiding some of the negative publicity that banks have attracted in the last year or two. But there are also disadvantages. Would the average man on the street know (up until a few months ago) that iShares had a link to Barclays, or that the advertisement on a London taxi for Lyxor had anything to do with a large French bank?
HSBC’s decision to brand its ETFs using the bank’s own name seems logical but risky at the same time. The bank wants to offer ETFs as one of a range of investment products, from index and exchange-traded funds at the cheaper end to absolute return, high-fee funds at the other. Yet HSBC will have to hope that it has its pricing points right, and that it doesn’t suffer a huge exodus from higher-margin accounts.
So what does this signify for the ETF market more generally? Thomas’ comments about ETFs being seen as a “disruptive technology” five years ago highlight how far these index-tracking funds have come, and how they have turned the asset management business on its head. With signs of ETFs going mainstream, in future we could well be spending less time talking about innovation and more comparing the finer construction and trading details of funds that are being produced on an industrial scale.