Exchange-traded commodities experienced outsized growth in 2021, along with the broader market for exchange-traded products. BNY helps to deliver opportunities with greater efficiency, liquidity and transparency throughout the ETP value chain.
Exchange-traded products (ETPs) have shown enormous strength in recent months. In general, they performed quite well as the equities markets readjusted to the shock of COVID-19. As of the end of June 2021, ETPs represented over US$9.3 trillion in AUM, with US$1.48 trillion domiciled in Europe, an all-time high for the region. Globally, that figure represents 49% year-on-year growth.* This performance reflects the long history of ETPs, which give greater access to assets to a broader range of investors and create opportunities for asset managers to innovate, especially in the area of exchange-traded funds (ETFs).
In the ETP space, exchange-traded commodities (ETCs) have benefited from this strong growth as well. ETCs extend the promise of increasing end investors’ access by providing a way to add the specialized asset class of commodities to their portfolios and minimize risk exposure.
While currently a small slice of the overall market for ETPs, ETCs saw outsized growth in 2020, growing 61% over 2019 to roughly US$262 million in AUM globally and growing 229% in terms of net new flows to more than US$61 billion.* Such growth makes sense in today’s climate. ETCs appeal to investors wishing to hedge against equities’ volatility and inflation as markets recover from COVID-19.
From a product perspective, ETCs have been able to take advantage of several structural advantages. As the ETC market matures, new solutions are emerging to address the ongoing challenges of managing an ETP, from creation and redemption to collateral management and payments. Asset servicers are adapting their capabilities up and down the value chain and leveraging technology to create greater continuity for asset managers.
The barriers to launching ETPs are coming down rapidly, making it easier to enter the market quickly and cost-effectively. Conversely, ETF issuers are finding it more challenging to raise capital and gain traction in the market distribution process. BNY’s ETF platform is helping underlying shareholders eliminate operational friction, minimize risk on the creation and redemption of shares, and support greater efficiency and liquidity by reducing the bid-ask spreads on the products and allowing market makers to provide a greater depth of book for shareholders.
Reaping the Benefits of the ICSD Model
Within EMEA, the International Central Securities Depository (ICSD) model has also brought additional efficiencies to European ETCs, ETFs, and the ETP market overall.
The ICSD international issuance model via Euroclear and Clearstream has contributed more to the market than simply providing the option of choice for ETP migration in the wake of Brexit. The strengths of the ICSD model also make it an excellent fit for fast-growing areas such as ETCs, which in some instances are more complex to establish than standard ETFs. ETCs are complex because they can be either physical (where the fund acquires and holds the underlying commodity) or synthetic (where a designated counterparty acquires and holds the underlying commodity, which in turn can require complex collateralization arrangements).
The ICSD model helps unlock greater operational efficiency, increases liquidity, eliminates unnecessary friction, and delivers on pressures for greater transparency from both investors and regulators. These benefits are even greater when the products are listed across several listing venues, because the ICSD model provides a centralised issuance and settlement platform.
The Royal Mint Physical Gold Securities ETC Highlights These Trends
The Royal Mint Physical Gold Securities ETC (RMAU, launched in partnership with HANetf as issuer, manager, and distributor), the first launch of ETC by a European sovereign mint, took ample advantage of the advantages of the ICSD model. It is domiciled in Ireland and registered for sale in Austria, Belgium, Denmark, Finland, Germany, Italy, Luxembourg, the Netherlands, Norway, Poland, Spain, Sweden and the United Kingdom.
RMAU is Europe’s first 100% sustainably sourced ETC. It reached US$250 million AUM just two months after launch, becoming one of the fastest-growing gold-backed ETCs in Europe. BNY is providing custody, paying agency, settlement agency, listing agent (Luxembourg and Dublin) and common depository services. Other sustainably sourced metals-based ETCs have been following suit, with commodities such as silver, platinum, palladium and gold.
Facilitating Greater Efficiency and Transparency
The ICSD model is becoming the issuance model of choice and will undoubtedly continue to play an important role in the growth of this market in Europe. As an international structure, it supports international distribution while delivering greater efficiency. It is helping to build a pan-European ETP market in which ETCs and other exchange-traded products make widespread use of a single, centralised issuance and settlement platform. For issuers, managers and investors, this flexibility suggests ongoing potential for ETC growth in the coming years.
This article was written with contributions from Jeffery McCarthy, Global Segment Head-Exchange Traded Funds and Ben Slavin, Global Head of ETFs, Asset Servicing, at BNY.
Learn more with BNY’s recent in-depth paper on the ICSD model for ETPs.
* ETFGI Global ETF and ETP Industry Insights Report, June 2021
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