Sections

Source Sector ETFs Designed For Shorts
By IU.eu Staff | July 27, 2009 4:18 am

The new European equity sector ETFs launched today by Source have been designed specifically to encourage use by short sellers, notably hedge funds, according to MJ Lytle, head of marketing at the London-based issuer.

Source this morning listed 18 ETFs tracking all but one of the Dow Jones 600 optimised supersector indices (there is no ETF tracking the real estate index). These optimised indices are based on the original DJ Stoxx 600 supersector indices but have been modified to address issues such as concentration, diversification, liquidity and the availability of stocks to borrow. IndexUniverse.eu reported on the index launch two weeks ago.

The new ETFs are listed on the Deutsche Boerse XETRA platform and all carry total expense ratios of 0.30% per annum. Existing swap-based ETFs managed by other issuers and based on the original DJ Stoxx 600 supersector indices are offered at total expense ratios of between 0.25% and 0.32% per annum.

In a press release issued by Source on the launch of the funds, the company says that it has worked with its partners (Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley and Nomura) to create a liquid and efficient lending market for these new sector products. Source maintains that this liquidity is essential to enable investors to use these ETFs to take both long and short positions.

In an interview with IndexUniverse.eu, Source’s Lytle explained that short selling of ETFs remains far less common in Europe than in the US. This reflects the historically high cost of borrowing ETFs in Europe, a by-product of the fact that ETFs do not form part of the general collateral pool used for European stock lending, said Lytle. He compared this with the US, where it is relatively easy to cover a short position in an ETF, either from the general collateral pool or from the “create to lend” market.

Lytle pointed out that the existence of different, non-fungible listings of the same ETF on different European exchanges also inhibits the development of a Europe-wide securities lending market in ETFs. Source’s decision to list its ETFs on a single European exchange (in Frankfurt) was partly to avoid a fragmentation of secondary market trading liquidity, he explained.

Lytle argued that hedge funds and other long-short investors who often take equity sector index views, typically combining a long position in one index with a short position in another, have tended to trade in sector swaps or futures in Europe, whereas in the US market they often use ETFs to create the same exposure. Source hopes that the new DJ Stoxx 600 optimised supersector index ETFs will offer efficient access to investors who want both long and short sector exposure.

Source now offers 54 distinct products in the equity (ETF) and commodity (ETC) segments, with US$774 million under management (as of Friday 24 July 2009).