IndexUniverse.eu editor Paul Amery recently interviewed Mark Weeks, head of ETF Exchange, a new exchange-traded fund platform at ETF Securities.

IU.eu: Mark, what is ETF Exchange?

Weeks: ETF Securities has developed and continues to operate a highly successful exchange-traded commodities programme. The company took a decision to try to capture a part of the rapidly developing exchange-traded funds (ETF) market in Europe and we looked at how to improve upon what we call first and second-generation ETFs – those offering direct, in specie index replication and those using swap-based replication via a single swap provider.

ETF Exchange has been developed to address three key concerns in the existing ETF market: first, counterparty risk; second, the lack of liquidity in a lot of existing products; and third, to encourage increased competition in the creation and redemption process. We felt that we could offer improvements in all three areas.

Our model is that of a consortium. We have an independent issuer – ETF Securities – which works with the consortium members (who are the funds’ authorised participants and are therefore responsible for all ETF creations and redemptions). The existing APs are Citigroup and Bank of America Merrill Lynch, but we aim to expand the total to six banks and hope to add two more consortium members by the end of this month. The APs are also the swap providers, so this structure ensures the existence of multiple counterparties for an ETF investor, reducing credit risk. The consortium members also work as distribution partners.

IU.eu: And who owns the platform?

Weeks: ETF Securities owns 80% and hedge fund SW1 Capital owns 20%. There is also the possibility for consortium members to become owners over time, based on the fulfilment of certain performance criteria.

IU.eu: There’s another ETF issuer in Europe with a very similar model to yours – Source. Are there any differences between the two platforms?

Weeks: There are some differences. First, we’re an independent issuer, meaning that from a commercial perspective we’re not competing with financial products offered by partner banks; second, we have our own independent sales force of over 20 people, rather than relying on the sales forces of the consortium banks (even though we work closely with them); and third, at the end of the day, ETFs are a cheap way of replicating index performance and require a low-cost operation such as ETFX.

IU.eu: What has motivated your choice of ETFs? You started out with commodity-related equity funds and some broad equity indices but have since added a suite of double leveraged and double inverse funds. Aren’t you concerned by the recent controversies over leveraged ETFs?

Weeks: We saw a niche in the market for the double long and short funds and decent investor demand for them. So far the assets under management have grown quite well and they’re also used a lot by day traders, creating some decent trading volumes. The controversy over leveraged funds in the US has made a number of issuers step back and think twice about getting involved in this area of the market, but we feel that as long as you are clear in the prospectus about what the ETF does and what index it tracks, and as long as this is presented very clearly to clients, then these can be good products to be involved in.

1 | 2 |

More on this topic (What's this?)

The Top 20 ETFs to Buy and To Sell Out of 776 ETFs (Shocked Investor, 10/19/09)

Emerging Market ETFs… Five Ways to Play (Investment U, 10/21/09)

Top ETFs To Sell Out of All 770 ETFs For The Short, Medium and Long Term (Shocked Investor, 11/6/09)

A watershed event this week for ETFs (Canadian Business Blog, 11/5/09)

Read more on Exchange Traded Fund (ETF) at Wikinvest