ETF Migration From AMEX To NYSE Heading Into Final Phase

With the recently completed merger between two giant exchanges, large-scale migrations are starting to take place among exchange-traded funds.

And the pace is likely to pick up as the New York Stock Exchange Euronext phases out the American Stock Exchange's ETF platform. Support for stock and ETF trading at the AMEX is scheduled to conclude on Dec. 1, according to NYSE officials.

Last week, State Street Global Advisors undertook the biggest single-day transfer of ETFs ever seen, moving 76 funds from the AMEX to the NYSE on Nov. 7. And on Oct. 31, Invesco PowerShares Capital Management moved 74 ETFs between the exchanges.

Most other major ETF providers have already started or neared completing shifting funds from the AMEX, which used to be the biggest ETF trading platform in the world. Now that's changing as it merges with NYSE, a gigantic integration process unlike the industry has ever seen for ETFs.

While such a massive move is unprecedented in size for the ETF world, some definite pluses could result, point out industry observers.

One of the major pluses could be to help spur the development of globally cross-listed ETFs for the fund industry's fastest-growing product line. That's particularly of concern since the AMEX did not have the global reach of NYSE Euronext.

At the same time, fund companies are making more connections with overseas exchanges. This pursuit of so-called cross-listings in a number of different exchanges for the same ETFs is picking up steam across markets in Europe, Asia, the Middle East and Latin America.

In fact, in the future, such cross-listing strategies are expected to become even more key to the continued growth and scope of U.S.-based ETF providers.

"One of the biggest potentials to explore as a result of our relationship with NASDAQ and our move to NYSE is cross-border listings of ETFs," said Benjamin Fulton, executive vice president of global product development for Invesco PowerShares Capital Management.

The U.S. is the most mature of all ETF markets. As a result, some analysts expect its growth rate to slow in comparison to less-saturated ETF markets overseas. Recent asset growth in Europe, in particular (where ETFs are still new to many retail markets) has eclipsed the growth rate in the U.S.

Through the end of the third quarter, ETF assets in Europe were up 13% in 2008. At the same time, U.S. ETF assets fell 6.6%, according to data compiled by Barclays Global Investors' global ETF research and implementation strategy team.

PowerShares' Fulton notes that both the NYSE and NASDAQ are increasing efforts to develop more-comprehensive guidelines for cross-listings. "The global consolidation of the exchanges is the driver, and the gaps are being bridged," he said.

SSgA's senior managing director Jim Ross agrees. "There's definitely a lot more discussion about it now than when I first started looking at it. And what we're seeing in terms of global flows into ETFs lends itself to global cross-listings, which should emerge as a trend within 2009," he said.

Ross, however, believes that global cross-listing of ETFs is not in all cases going to be a slam dunk. An example he gives is Asia. Even though SSgA has had limited experience with cross-listings into Asia so far, Ross says that the ETF provider has learned some valuable early lessons about the realities of cross-listings among different exchanges.

Right now, the SPDR Gold Trust (NYSE: GLD) is cross-listed on exchanges in Singapore, Hong Kong and Tokyo. Also, the SPDR Trust (NYSE: SPY) has been cross-listed in Singapore.

Ross says that GLD, which was listed in Hong Kong on July 31, has shown activity in all three markets, while SPY has barely been traded in Singapore.

The reason for that, according to SSgA, probably comes down to a key issue facing all U.S.-based ETFs cross-listing on foreign exchanges—the trading hours of underlying securities.

The U.S. equities market's trading times are 12 hours off those of most Asian markets. Therefore, SPY securities are not being traded during the Asian day, while the gold bullion that serves as the foundation of GLD is one of the few investments actually traded 24 hours a day.

"It's not always efficient to try making a market in a cross-listed ETF when the underlying securities are not active," Ross said.

This experience has led SSGA to conclude that in Asia it might make the most sense to cross-list U.S.-based ETFs rather than focus on Asian equities and other securities which have trading hours that overlap with the Asian market day.

PowerShares' Fulton also finds that foreign markets present unique challenges for U.S.-based ETF managers. "Asia is a huge opportunity, but more cumbersome," he said.

These local considerations aren't expected to significantly dampen overall interest in cross-listing ETFs globally, though. Providers point out the increasing activity by exchanges across the globe to make it easier to cross-list from anywhere at any time.

And in selected markets, such as Mexico, local regulatory bodies are showing signs of making real efforts to aid the process. Still, those markets remain the exception to the rule in the global exchange world, according to ETF experts.

Some of the challenges still facing the industry listed by ETF providers working on the issue include:

Distribution issues are leading PowerShares to work closely with parent company Invesco to take advantage of the institutional asset manager's global blueprint. ETF cross-listings will be most actively pursued in Europe and Asia, with Latin America and the Middle East even more opportunistic ETF ventures, Fulton says.

In Europe, Invesco has a huge institutional and retail distribution infrastructure, and that market should take the lead in a major cross-listing initiative from PowerShares.

"Due to the global initiatives of NYSE Euronext and NASDAQ OMX, we think that in 2009, cross-listing into Europe could become a reality," Fulton said. "We are telling our European team that they may have a wide range of ETFs hitting their shelves next year."

One opportunistic example that PowerShares is exploring is in the oil-rich United Arab Emirates' Dubai. The NASDAQ OMX has a strategic relationship with the Middle East financial center of Dubai, and Dubai has been very active in its effort to develop a 21^st-century exchange platform in the Middle East.

SSgA also sees the Middle East as an important ETF market, but Ross explains that large financial institutions and the wealthiest investors in the Middle East already trade through branches of Citigroup, Goldman Sachs and other major global financial players with branches in the Middle East.

"The question in the Middle East is not the level of ETF trading activity. That's already there. But is there additional demand that could only come from cross-listing, at the next investor tier down from the large institutions, from midlevel institutions and financial advisors that are not already clients of U.S. banks?" Ross said.

Fulton stresses that while cross-listed ETFs are far from a fait accompli, PowerShares does think it is the best long-term option for global ETF asset growth. "To take large, successful funds and cross-list them drives economies of scale and efficiencies globally," he said.

Ross believes that global cross-listings of ETFs may have some interesting ancillary benefits for ETFs listed in the U.S.

"Getting the demand in the local market is very important, and we are focused on that, but just getting local markets talking about ETFs may also drive trading back in the U.S.-listed ETFs," he said.

In fact, Ross thinks it will be hard to evaluate the success of global cross-listings based solely on the local asset flows.

"Once it is talked about in a local market and can be traded there, the largest investors may seek the greatest efficiency in trading, and that may drive them back to trading a U.S.-listed ETF," Ross said.