20th anniversary of first ETF listing
How do you build and grow a market? At London Stock Exchange, our approach has always been guided by our four pillars: innovation; partnership; integrity; and excellence. Over the 20 years since we welcomed our first Exchange Traded Fund (ETF), we’ve applied these principles to the continually developing needs of issuers and investors in this fast-moving market. Today, with a 22%1 share of on-exchange ETF trading in Europe, we continue to expand our offering, fuelled by our commitment to innovation, our unrivalled international reach, and our proven track record in customer service.
It’s been a long and eventful journey since the iShares Core FTSE 100 ETF was listed in London, on 28 April 2000. There have been many milestones, including the introduction of non-UK issuers in 2007 helping us to expand our offering to more than 100 products. These all have been informed by the need to innovate to simplify trading, reduce costs, boost liquidity, and thus facilitate growth.
We couldn’t do it on our own, of course. Only by working closely with our 36 issuers and 19 market-makers are we able to offer such diversity across the Exchange Traded Product (ETP) universe. With 60 new fixed-income and thematic ETFs listed in 2019, we now offer trading in more than 1,250 ETFs and more than 300 Exchange Traded Notes (ETNs) and Exchange Traded Commodities (ETCs).
The pace of innovation and growth in the ETF market undoubtedly picked up after the global financial crisis of 2008 as investors looked to recover. ETFs became the ideal vehicle for investors to participate in a steady, broad-based market recovery that extended to an unprecedented 11-year bull run. Passive equity investments yielded strong returns for a wide range of investors, but appetite for similar exposures to other assets also fuelled further ETF growth.
Throughout this period of expansion, London Stock Exchange worked with issuers, market-makers and investors, innovating to improve choice and simplicity, helping to diversify portfolios and manage risks. Among many examples, one of the most significant has been our efforts to enable trading and settlement in multiple currencies, making it easier for international market participants to trade ETFs in London. Since 2013, market participants have been able to settle London-listed ETFs via an international central securities depository (Euroclear Bank); over 50% of ETFs listed on our market utilise ICSD. In 2014, we added HKD and CNH, having already enabled settlement in EUR and USD, and welcomed to the market London’s first ETF to offer physical exposure to Chinese A-shares.
London now offers unparalleled choice, including active ETFs, emerging markets, fixed income and, more recently, ESG-based products. The latter is proving particularly popular, with turnover in ESG ETPs more than doubling year-on-year to £650 million in 2019.
“We will continue to see ETFs revolutionising more sectors and breaking new boundaries over the next two decades. Asset management is going through a structural shift driven by regulation and technology. A new focus on the true sources of returns will shift the industry from traditional security selection toward a whole-portfolio, outcome-oriented approach where indexing and ETFs take centre-stage. Developments in fixed income, factors and the seismic shift to sustainable investing will drive the next leg of ETF and index fund growth in the region.” Stephen Cohen, Head of EMEA, iShares
Globally, ETFs have grown strongly in the last five years, almost doubling in AUM from USD 2.9 trillion in 2015 to USD 6 trillion at the end of 2019. Much of that recent growth has come in Europe, where ETP assets exceeded USD 1 trillion by the end of 2019.
“ETFs are uniquely the only democratic investment product being used by institutional investors, financial advisors and retail investors. The ETF product evolution has shaped the profile of ETFs and ETPs users, initially appealing to equity-focused investors and evolving over time to multi-asset class and fixed income and commodity specialists. Today, slightly more than half of all ETFs and ETPs in Europe provide exposure to equity indices and account for 60% of all assets. Fixed Income products now account for 28% of assets, 10% of assets are in products providing exposure to commodities while 1% of the asset are in Active strategies.” Deborah Fuhr, Managing Partner and Founder ETFGI
At London Stock Exchange, we have grown apace, with ETPs currently accounting for 11% of the exchange’s daily turnover, versus 6% five years ago. Our overall ETP orderbook turnover for 2019 was GBP 103 billion, and has grown 89% over the last five years. Despite this growth, comparison to ETP trading levels recorded on US exchanges suggest that there is still further room for growth in Europe.
We’re delighted that our efforts to deliver value to issuers and investors has been recognised, most recently as ‘Best European Exchange for Listing ETFs’ by ETF Express. But we continue to push forward with new innovations, notably our new request-for-quote service, ‘RFQ 2.0’, scheduled to roll out in summer 2020. We have consulted with the market over the last two years to ensure that we are meeting market needs, focusing in particular on rising expectations around best execution and post trade operational efficiency, whilst ensuring a seamless end-to-end experience.
London Stock Exchange’s RFQ 2.0 will change the ETF trading landscape, offering auto-complete RFQ functionality with an innovative order book sweep and direct central counterparty clearing (CCP) links, all under one exchange. It helps investors achieve better execution outcomes by accessing different types of liquidity instantly and in one place. By not limiting the request to just RFQ responses, RFQ 2.0 can improve on the risk price and trade against lit and hidden liquidity on the order book – achieving a better execution price. The CCP links support operational efficiency as post-trade processes become more important in response to the impending Central Securities Depositories Regulation (CSDR).
We believe initiatives such as RFQ 2.0 will bolster liquidity and help to ensure fair and orderly pricing in line with our commitment to orderbook integrity, supported by robust market supervision capabilities. As we’ve seen recently with the extreme volatility across all markets, pricing and liquidity cannot be taken for granted. On 28 February 2020, ETP turnover topped GBP 1.5 billion on London Stock Exchange and March 2020 proved a record month for ETP volumes with more than GBP 20 billion traded overall.
But we realise that trading relies on the confidence of market participants. Today, market operators around the world are keenly aware of their responsibility to provide orderly and functioning markets and continuity of service. At London Stock Exchange, we take the importance of keeping our orderbooks open very seriously, so that capital and risk can be priced in a fair and transparent fashion, supporting global financial stability and economic growth. Particularly now, it is hard for us to predict the future with any level of certainty. The progress of our ETP markets will continue to be guided by our commitment to innovation, excellence and integrity in partnership with our clients.
“Innovation is part of our DNA. This is especially true in the development of the ETF industry globally, which has grown rapidly over the past 20 years, and where FTSE Russell partners with its customers to deliver innovative index solutions to meet their needs. From market-cap indexes to the latest sustainable investing, smart beta, or multi-factor strategies in equity and fixed income, FTSE Russell’s teams are part of the ongoing evolution of the global ETF market.” Waqas Samad, Group Director, Information Services, London Stock Exchange Group and CEO FTSE Russell
Central to our strategy will be our commitment to London Stock Exchange’s role as a leading gateway for international investment, reflected in the diversity of our ETPs offering. This is also reflected in the diversity of our top 20 most-traded ETFs, representing a world of opportunity and choice – from the FTSE 100, the UK’s most popular benchmark, to the S&P 500, commodities, fixed income and emerging markets. As investor preferences will continue to evolve over the next 20 years, our commitment to issuers and the market will remain steadfast.
Head of Business Development, ETP and IOB
1 Borsa Italiana Database