Exchange Traded Products Q&A with Laura Morrison

Laura V. Morrison heads the U.S. Exchange Traded Products (ETPs) listings and trading business for NYSE Euronext

What are the various types of ETPs?

LM:We classify ETPs that list on NYSE Arca into four different categories:  Exchange Traded Funds (ETFs), Exchange Traded Vehicles (ETVs), Exchange Traded Notes (ETNs) and Certificates.  Like stocks, ETPs can be bought and sold (long or short) throughout the trading day.

An ETF is an investment vehicle that combines key features of traditional mutual funds and individual stocks. Like index mutual funds, ETFs represent diversified portfolios of securities, which often track specific indicies. ETFs are open-ended securities registered under the Investment Company Act of 1940.  Examples of ETFs are SPDR S&P 500 ETF Trust (Symbol: SPY), Direxion Daily Financial Bull 3X Shares (Symbol: FAS) and Vanguard MSCI Emerging Markets ETF (Symbol: VWO).

ETVs are open-ended trusts or partnership units registered under the Securities Act of 1933.  This category often includes commodity and currency trusts.  They are treated differently from a regulatory standpoint than standard ETFs and can have different tax implications.  Examples of ETVs are CurrencyShares Euro Trust (Symbol: FXE), United States Oil Fund LP (Symbol: USO) and SPDR Gold Trust (Symbol: GLD)

ETNs are senior unsecured, unsubordinated debt obligations typically issued by a pubic company, particularly a financial institution.  They are designed to track the total return of an underlying index or other benchmark, minus investor fees.  ETNs are not equities or index funds, but they do share several characteristics. For example, like equities, they trade on an exchange and can be shorted. Like an index fund, they are linked to the return of a benchmark index.  ETNs are different than ETFs due to the fact that they are subject to the creditworthiness of the issuer, adding another principal risk to the main market risk associated with most traded securities.  Examples of ETNs include iPath S&P 500 VIX Short-Term Futures ETN (Symbol: VXX), iPath Goldman Sachs Crude Oil Total Return Index ETN (Symbol: OIL) and PowerShares DB Gold Double Short ETN (Symbol: DZZ)

A Certificate is a security with the legal characteristic of a  debt instrument. They are usually issued by banks and have settlement terms on a given date that are known and guaranteed at the time of issue. Certificates are unsecured, unsubordinated debt securities where returns are based on the performance of a market index or security minus applicable fees. Investors can hold the debt security until maturity. Certificates cannot be redeemed and are not continuously issued. Examples of Certificates include BofA/ML Step Up Notes Linked to the S&P 500 Index (Symbol: SKL), BofA/ML Market Linked Step Up Note Linked to the S&P 500 (Symbol: SKN) and Citigroup 3% Principal Protected Notes linked to the Russell 2000 Index (Symbol: MOU).

Is the number of ETPs growing?

LM:  Yes.  As the world’s largest venue for ETPs, NYSE Arca currently lists over 836 ETFs representing over 90% of all U.S. listed ETFs and 96% of the assets under management (AUM).  In 2010, we listed 220 new ETPs (a new high) and we expect that trend to continue. Of the total 1,124 ETPs we list, there are 837 ETFs, 57 ETVs, 132 ETNs and 98 Certificates.

On a macro level, ETPs now represent approximately 26% of all notional trading on U.S. exchanges and account for five of the top ten most actively traded securities in the U.S. ETPs recently hit the $1 trillion in assets under management, an increase of 29% from December 2009.

How does your group add value to new ETP listings?

LM:  With 46 ETP issuers and several more prospects in registration, we have extensive expertise helping issuers bring ideas to fruition, even if it takes several years.  This often includes direct contact with the SEC advocating for new product approval especially with more unique or non-traditional products and in the aftermath of the financial crisis.  We help educate regulatory bodies in order to build their knowledge base of these products.

In addition, if our issuer selects from one or our 15 Lead Market Maker (LMM) firms on NYSE Arca, the LMM will strive to provide a reasonable level of liquidity in a given fund which is especially important when a fund first launches.  Our market maker requirements promote liquidity in return for the economic incentive of a higher rebate for providing liquidity and a lower fee for taking liquidity. In 2010 we enhanced our LMM program by implementing a tiered rebate structure, which increased the rebate for 90 percent of our products.

What trends can we expect to see in 2011?

LM:We'll probably see more diverse, innovative and unique products expanding on themes that track the performance of volatility and commodities based products, equity and emerging markets.  Other popular growth trends include precious metal ETVs (mainly physical metal funds) as well as ETNs MLP ETNs and VIX-related volatility ETNs.   

I also expect we'll see the continuation of third and fourth movers tied to low expense ratios and free trading such as the re-entry of FocusShares into the ETF space linked to free ScottTrade ETF trading.  I also expect we'll see more actively managed ETFs, both of the transparent and possibly non-transparent nature.

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