Original article by Lori Pizzani, reprint graciously provided by StructuredRetailProducts.com
US structured products linked to ETFs get traction
27 Aug 2014
Structured products that are linked to a single exchange-traded fund (ETF), or to a basket in which one of more ETFs is included, are becoming more popular in the US retail structured products market.
SRP data shows that 998 separate structured products linked to the performance of one or more ETFs were issued and sold a collective $3.5bn in 2013. In addition, ETFs used as an underlying asset in structured products made up about 7.5% of all US structured products and accounted for 10% of overall sales last year.
That figure was up from 2012 in which sales of ETF-linked structured products were at $3.4bn across 942 products meaning that in 2012 ETF-linked US structured products accounted for 7% of overall sales volume and 9% of all issuance.
So far this year, through 14 August 2014, both issuance and sales of ETF-linked products are slightly ahead of last year, while percentages are so far holding steady at about 7% of sales and 10% of issuance.
Benefits and drawbacks
“ETFs are popular and recognisable for investors, and more efficient from a hedging perspective for the (structured products) desk – a potential win/win,” said Joseph Halpern, CEO of Exceed Investments in New York. “Some ETFs are arguably more known/popular than the underlying index. Furthermore, options in these ETF underliers are generally liquid, allowing for easy hedging for the derivatives desk.”
According to Halpern potential drawbacks would be the fees associated with more expensive ETFs which would pass through to the structured product buyer, and issues with decay due to rolling on some commodity related products.
“[However], I do not think either of these drawbacks affect the vast majority of ETF-based structured products,” he added.
The popularity of ETFs in general is crystal clear. According to the Investment Company Institute in Washington, DC which tracks the number of ETFs and their assets under management, the collective current 1,364 US ETFs have assets of $1.8tr as of the end of June 2014. That’s a big jump from one year earlier when there were 1,233 US ETFs with a combined $1.4tr in assets. ETFs first burst onto the landscape in 1993 with the launch of the SPDR Fund from State Street Global Advisers which tracks the S&P 500 Index.
By far, JPMorgan is the biggest issuer of ETF-linked structured products in the US marketplace. In 2012, the bank sold nearly $1.4bn in ETF-linked products (41% of all ETF-linked sales) across 93 products (10% of all ETF-linked products). The bank’s sales of these products increased to $1.5b in 2013 (43% of all), across a far greater 361 ETF-linked structured products issued (36% of all). Year to date 2014, the bank has seen sales of a greater $920m (46% of all) across 236 products (36% of all).
SRP data also shows that the most popular and widely used ETF among US structured product providers, is the iShares MSCI Emerging Markets ETF although usage of this tracker fund is seeing a downward trend. In 2012, this ETF was an underlying 164 times, followed by 160 times in 20143 and thus far 143 times in 2014.
The JPMorgan Efficiente 5 ETF was the second most featured ETF underlying for all three years but has also seen a decline, presumably as structured product providers diversify their offerings across a greater number of ETFs.
A JPMorgan spokesperson did not return calls requesting comment by press time.