Credit Suisse expands into UK ETF market

COMPETITION in the exchange-traded fund (ETF) market stepped up another notch yesterday when Swiss bank Credit Suisse launched 45 ETFs on the London Stock Exchange (LSE), solidifying its European presence and paving the way for a global launch of its ETF product.

For the past decade, new arrivals in the European ETF space have been trying to wrestle market share away from the behemoth that is BlackRock, whose European division iShares controls 33.2 per cent of the European market.

But Credit Suisse is confident that ETF provision is not a zero-sum game, particularly in Europe, which is lagging behind the US market. Deutsche Bank forecasts that annual growth in the European exchange-traded product market may reach 25-30 per cent before the end of 2010.

Credit Suisse’s global head of ETFs Dan Draper says: “We believe it is an exciting time for the European ETF industry. This is only the beginning of the story, we see potential for rapid growth in Europe, similar to that seen in the US over the past decade.”

His colleague Bob Parker, senior adviser and member of the Credit Suisse global investment committee, says: “Our latest development is consistent with how we see client demand and changes in capital flows. Over the past 10 to 15 years, clients have been moving away from traditional asset management and into either ETFs and index products or into alternatives.”

But while there is certainly room and demand for more providers, entrants still need to demonstrate an edge over their competitors to acquire market share in what is a highly competitive industry.

Credit Suisse has managed to differentiate itself from the existing UK providers. The tie-up between its investment bank and its asset management division has allowed Credit Suisse to become the first European provider to offer both physically-backed and swap-backed ETFs. Of the 45 listed yesterday, there are 32 physically replicated ETFs and 13 swap-based products.

The swap-backed ETFs allow Credit Suisse to place a strong emphasis on emerging markets within its London-listed range, including the first ever Ucits-regulated Chinese A-shares ETF, giving exposure to the Chinese market.

Swap-based ETFs both remove many of the problems associated with tracking error and give exposure to markets that are more difficult to access, but they throw up the issue of counterparty risk. This has become particularly relevant post-crisis so Credit Suisse ETFs have a daily swap reset, restricting counterparty risk to a single day’s mark to market movements.

Credit Suisse certainly has ambitious plans for its ETF range. Whether it can gain enough traction in the UK market remains to be seen.