ETF Securities capitalises on commodities

ETF Securities has come a long way since its inception. Along the way it has weathered the financial crisis and is now seeing new challenges as the regulatory landscape changes. Mark Weeks, chief executive of the company’s European operations, speaks to Clare Dickinson about the firm’s history and future strategy

Mark Weeks, ETF Securities

Since starting life in Australia in 2003, ETF Securities has experienced rapid expansion, all the while maintaining its desire to be a pioneer in its field. The company was the first to develop gold and oil exchange-traded products and also launched the world's first multiple swap counterparty Ucits III-compliant exchange-traded fund (ETF) platform. These and more recent developments have taken its assets under management to roughly $27 billion, with a weekly turnover of $1.7 billion.

ETF Securities was founded by chairman Graham Tuckwell. "Graham was involved in investment banking and developed a strong conviction about commodities," explains Mark Weeks, London-based chief executive of the firm's European business, ETF Securities UK.

Resource funds already had a significant presence in Australia and there was a sense that the bull run in commodities had many years to run. "While that was exciting, many of the products weren't accessible to investors, whether institutional or retail," says Weeks.

The firm's answer to the problem of broadening access was to develop a gold exchange-traded commodity (ETC) in Australia. Tuckwell then partnered with the World Gold Council to list the product on the London Stock Exchange (LSE), and did the same with an oil ETC developed in conjunction with Shell.

"Right from the early days, we have always been good at picking well-respected partners," says Weeks.

In 2006, ETF Securities was itself listed on the LSE after relocating its main operations to the UK. Its first metals products were listed the following year, and December last year saw the launch of the Industrial Metal Limited physically backed industrial metals platform.

Back in 2007, the company also launched Commodity Securities Limited, Europe's first complete commodity platform, in partnership with American International Group, with UBS replacing it as partner in 2008. In the same year, ETF Securities expanded the platform to include short and leveraged products and launched its first currency ETCs.

In what proved to be a busy year for the firm, it also launched ETF Exchange (ETFX), the world's first multiple swap counterparty Ucits III-compliant ETF platform. The timing was unfortunate, however, as it coincided with the collapse of Lehman Brothers and the ensuing global financial crisis. The platform was almost mothballed, says Weeks, but it now has four investment banks acting as swap counterparties and distributors.

All this pre-dated Weeks' arrival at the company to head the ETFX platform in June 2009. Weeks brought with him 20 years' experience of working in banks' equities divisions. Although ETF Securities' metal products are largely physically backed, around 30% of the ETFs are swap-based, he says. "Decision-making for the banks involved in ETFX resides mainly in the area of prime brokerage and that was my background. The senior management here had commodities backgrounds, so they brought me in for my equities experience."

The firm launched in the US in 2009 and is now bolstering operations in Asia. It has an office in Tokyo and has relocated senior manager Fred Jheon to head its Asia ex-Japan business.

Despite the devastation inflicted on Japan by the recent earthquake, tsunami and nuclear disaster, the firm's Asia business has remained unscathed, says Weeks, though one noticeable development has been a shift in allocations out of nuclear power and into alternative energy or coal. "In January, consistent with what was happening in the market, we saw a big sell-off of gold. Then during the Middle East crisis in February we saw huge inflows into our oil-based products and back into gold because people were looking for a safe haven. The trends are less clear-cut following the disaster in Japan."

Dramatic global events aside, other obstacles lie ahead for the industry, he says. The UK Retail Distribution Review will throw up challenges around providing investor education and increasing transparency, for example. In addition, the fragmentation of the European market will also need addressing. "There is an argument for listing in as many places as possible to increase access to domestic investors. The downside to that is that you spread liquidity." The company is planning to reduce its listings to combat this danger.

Weeks also expects to see consolidation of products and providers. "Ucits funds are not cheap to run, so if the funds don't attract sufficient assets this will likely lead to product consolidation in Europe."

While continuing to innovate in the commodities space, the company could tap other areas in the future, he says. "We are quite bullish on commodities for the next couple of years, but we can foresee a time when it may make sense either to grow the existing commodities range with acquisitions or diversify and acquire businesses that perhaps have strong franchises in the equities space."