Here’s to the next 20 years!

To mark the 20th anniversary of exchange-traded funds on the Swiss Stock Exchange, Alain Picard, Head of Trading Sales & Management, looks back on their unique success story and reveals what chapters are to follow.

Mr. Picard, what’s the history of ETFs on the Swiss Stock Exchange?
I joined the Swiss Stock Exchange nine months after the segment was launched. Back then, we only had three listed ETFs– including the first to be listed on the SMI, which was launched by Credit Suisse. Soon after, UBS became the second local provider, which was important for the growing familiarity and prevalence of these products in Switzerland. There’s no doubt that we laid the foundations for future success back then. Right from the start, I was personally fascinated by the ETF ‘wrapper’ as an efficient, cost-effective, broadly diversified, and secure investment product.

What contribution did the Swiss Stock Exchange make to this?
First, we were involved in establishing the regulatory requirements and negotiating market making contracts with FINMA. Second, we addressed the challenge of investor education and training at a very early stage by publishing content on our website, writing publications, and launching an event series that we still hold today – albeit currently only virtually, such as the upcoming “BörsenTalk” (formerly ETPD) on September 15, 2020.

How did the Swiss Stock Exchange respond to the steadily growing trading and transaction volume?
We were the very first stock exchange to introduce fully electronic trading, including settlement. We continually invested in high-performance technology, thereby confirming our leading role again and again. For example, we were the first stock exchange to implement the then state-of-the-art trading technology X-stream INET from NASDAQ – which was also available for ETFs from November 2013 onward.

What were the advantages?
The introduction of this technology together with the corresponding high-performance interfaces was a milestone for market making. Quotes could now be entered, changed, and deleted faster. As a result, the spreads grew narrower – and ETF trading as a whole on the Swiss Stock Exchange became more attractive – for both issuers and investors. Today, the bid-ask spread for very liquid ETFs is less than 5 basis points.

Did everything go smoothly right from the start?
In the first few years, the potential was recognised immediately and there was a sense of optimism among product providers. But up until the financial crisis, ETFs were primarily an interesting niche product that had to contend with the dominance of actively managed investment funds. The discussion about retrocession, costs, and performance only began in earnest after 2008/2009. This meant that the core of a globally diversified portfolio could be covered cost-effectively with ETFs for retail investors, too. Otherwise, this was only possible for major institutional investors.

The ETF industry also dealt well with the initial discussions on synthetic index tracking and stock lending by increasing transparency and stepping up training. Much of this may explain why ETFs have worked excellently as a trading instrument on the Swiss Exchange for the past 20 years and have withstood several extremely volatile phases – most recently, when COVID-19 rocked the markets this spring.

And where do we stand now?
We are currently close to the 1,600 ETF mark from 28 different providers – and new products are being added on a regular basis. With ETFs, a very wide range of investment topics can now be covered efficiently and cost-effectively. As before, you can get access to a global equity portfolio with a single trade on the Swiss Stock Exchange. Individual sectors, industries, regions, and strategies can also be chosen almost at will – equivalent ETFs are usually already available to investors thanks to the innovative capacity of our product providers.

ETF turnover has also grown steadily and has already exceeded CHF 100 billion threshold several times. Just in the first six months of 2020, it grew (due to COVID-19) by 25.1% year-on-year to CHF 66.7 billion – with the number of trades even rising by 75.1% to more than 900,000. This success is thanks to strong cooperation between product providers, market makers, and trading desks – I would like to thank all of our customers for this!

What will the future bring?
With the launch of ETF Quote on Demand (QOD) towards the end of the year, we want to bring additional volume onto our stock exchange system. The success story of ETFs has been written not only on exchanges but also in over-the-counter business – but only trading on a regulated stock exchange offers the associated benefits in terms of efficiency and reliability. For this reason, we are complementing the current market making order book with a new QOD book in which professional customers can request quotes from liquidity providers committed by us. Before making a trade, there is the option to “sweep” the market making book for a potential better deal. With this initiative, we are aiming to further strengthen exchange trading in ETFs so as to be ready for the next 20 years.

What trends are you seeing at the product level?
We are currently seeing a lot of listings in the field of ESG and specialized ETFs. There are also listings for ETFs that aim to generate alternative income with a wide range of strategies in order to reduce their dependence on share performance alone. In addition, actively managed ETFs remain very popular. This product category combines the quality of ETFs with the advantages of actively managed assets. So even after 20 years, there are still new ETF innovations for investors to discover on the Swiss Stock Exchange.