July 2007

ETFS: CDS made easy

The first credit default swap ETFs are due to be launched this summer, discovers Nick Fitzpatrick 07_07_guignardA French asset management platform is planning to offer simple exposure to the credit default swap (CDS) market. EasyETF, which is owned by AXA Investment Managers and BNP Paribas Asset Management, intends to launch three exchange-traded funds (ETFs) linked to CDS indices before the end of the summer as part of the range of funds already offered by EasyETF. Each of the funds is linked to one of three iTrax CDS indices. They are all UCITS III products and will be distributed across borders to institutions and wealthy individuals. A CDS is a swap that is designed to transfer the credit exposure of fixed income products between parties and is the most widely used credit derivative. An ETF, meanwhile, is a listed fund that trades like a share and passively tracks an index. CDSs are famed for their complexity but EasyETF says the funds will offer investors an easier way to access this type of structured product. Matthieu Guignard, co-head of the EasyETF range at Axa Investment Managers, said: “The benefit of a CDS-based ETF is the lack of complexity. The CDS market is an OTC [over-the-counter] market and some investors find it difficult to invest in these types of markets because there is the credit risk of your counterparty to consider, the operational burden and the need to sign ISDA agreements, which can be long and painful. “But a UCITS III ETF vehicle provides exposure with much more ease.” Commodities exposure
EasyETF has secured an exclusive licencing agreement with International Index Company, which owns the iTrax brand. The indices cover Europe Main, Europe HiVol and Europe Crossover. EasyETF is a relatively small player in the European ETF market with  e5.3bn of assets under management and around 6% market share. But the platform specilises in niche and innovative investment areas such as real estate and commodities. Investors use ETFs to gain commodities exposure, says Guignard, because it is less risky than the main alternative route through the futures market. Commodities and credit derivatives are seen as ways to gain alpha returns. Although the ETF is favoured as a passive tool, they are also marketed to active investors. Guignard says: “In general, ETFs are more relevant to passive investors and less so to active managers. However, we have a number of investors that use a core-satellite strategy, whereby the core is indexed and the satellite is active. It is possible to be active in your satellite portfolios even by investing in passive products. “Some of our clients index the active satellite element in our ETFs. Investors who want to access commodities may do this.” The development of the ETF market in terms of products is exponential, unlike the money rolling into them. However, although ETFs represent around just 1.5% of the size of the mutual fund market, they are only five years old in Europe and expanding. “The ETF market is still very small compared to the mutual fund industry, but it is growing faster. In 2006 the ETF market in Europe witnessed growth of  63% over 2005. The beginning of 2007 is also on the same track.” ETFs have been established for longer in the US, but Europe is catching up, says Guignard. Last October it emerged that Continental, a German firm, had invested e300m of pension assets in ETFs instead of using external asset managers. Indexchange, a Munich-based ETF firm since taken over by Barclays Global Investors, provided the funds. The CDS launch reflects the push by ETF providers into less common asset classes. “We’ve seen ETFs on most main asset classes, and we are now seeing ETFs being launched based on structured products and on quant models,” Guignard says. © fe July 2007

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