On April 16, 2008, the first and only Exchange Traded Fund (ETF) in the US based on TOPIX (Tokyo Stock Price Index) was listed in the US on the largest ETF marketplace in the world - NYSE Arca. The new ETF is developed and managed by Northern Trust Global Investments (NTGI), a subsidiary of Chicago-based Northern Trust Corporation, and is traded in US dollars under the name "NETS TOPIX® Index Fund (Japan)", ticker "TYI".
NTGI is a large US investment company that offers a full array of active, passive, enhanced, and other products. Although this is the company's first foray into the ETF business, NTGI plans to increase its ETF lineup, focusing mainly on ETFs based on famous indexes used widely throughout the world, such as FTSE 100 (UK), CAC40 (France), DAX (Germany), S&P/MIB (Italy), S&P/ASX 200 (Australia), Straits Times (Singapore), and Hang Seng (Hong Kong China). TOPIX was elected as the benchmark index for US investors to invest in Japanese equities.
TOPIX is calculated and published by the TSE based on the 1,725 Japanese common stocks listed on the TSE First Section (as of June 30, 2008), and is widely known as a key benchmark index. In light of this, the listing of a TOPIX ETF in the US was realized under the name of NETS TOPIX® Index Fund (Japan). On April 25, concerned parties gathered on the NYSE Euronext marketplace balcony and celebrated the new product with the ringing of the opening bell. Many expect that this ETF will enable more efficient asset management in the US based on TOPIX, and that US investors' interest in Japanese stocks will increase even further in the future.
TSE interviewed two experts about the new ETF listing.
Ms. Lisa Dallmer, Senior Vice President, ETFs & Indexes, NYSE Group, Inc.
Could you explain the current ETF market in US?
Ms. Dallmer: The US ETF marketplace is the largest in the world as measured by the $534 billion in assets under management (AUM) at the end of first quarter, relative to the global ETF AUM of $760 billion. The US market place began in 1993 with the listing of the SPDR S&P 500 ETF, and now has grown to 612 ETF listings. The pace of asset gathering in the US has been tremendous each year, as an example in 2007 US ETFs increased AUM by 42.7%, which is strong compared to the 2007 increase of the MSCI US index at 4.1% and MSCI World Index of 7.1%. This is clear evidence of the usefulness of the ETF as a packaging mechanism to distribute index investment exposure. Our ETF listings in the US represent a wide range of investment exposure such as broad domestic equity indices, benchmark country indices, fixed income, commodities, and currencies. The notable new product listings in the US market are in leveraged and inverse exposure to equity and commodity indices, as well as fully transparent actively managed equity portfolios. NYSE Euronext is the leader in ETF listings and trading where we utilize our fully electronic market place, known as NYSE Arca for the trading. NYSE Arca-listed ETFs represent 56% of the nearly $534 billion USD in asset under management in the US; and NYSE Arca's average daily handled volume in shares for ETFs during May 2008 was 296 million compared to 219 million during May 2007, representing a 35.2% increase year-over-year.
Could you explain how ETFs are used?
Dallmer: ETFs are attractive investment products for all types of investors. They are simple, transparent and offer flexible, cost efficient exposure to many asset classes, including those less easily accessible such as emerging markets, bonds, real estate, private equity and commodities. The features of an ETF are appealing to retail investors because the ETF can either target exposure to specific sectors or be implemented an asset allocation model as "beta" or broad market exposure. The recent and more specialised ETF product offerings, such as the NETS, also bring new asset classes like the TOPIX to investors who otherwise would not have such an investment opportunity. Pensions and other institutional fund managers use ETFs as a way to equitize cash, create low cost broad market exposure, gain short or inverse exposure, and manage other asset allocation decisions. The main benefits to clients are the following:
How do you see the new listing?
Ms. Dallmer: In January of 2007, NYSE Euronext and the TSE announced a Strategic Alliance with the aim of increased cooperation between the exchanges on trading opportunities and technology. We enjoy a good relationship with the TSE and have seen their success grow. NYSE Euronext is very pleased with the partnerships we have with the TSE and NTGI on the NETS offerings. We view the NETS TOPIX Index Fund as a key offering for US investors seeking exposure to Japan through a trusted flagship index defined by the high quality listing standard of the TSE. We note the ETF's success has been given a strong foundation from which to operate because of the index transparency, ease of trading, and arbitrage opportunities with the TOPIX futures contract, all of which is a draw to investors and good for the exchange.
Mr. Steven Shoenfeld, Chief Investment Officer,
Global Quantitative Management, Northern Trust Global Investments
Why did you decide to enter into the ETF business at this time?
Schoenfeld:NTGI is one of the largest index/quantitative manager, with over US$280 billion in assets invested in the world's equity and fixed-income markets. We offer a wide-range of investment vehicles for institutional and individual investors, and we are proud to serve pension funds, endowments, foundations and high-net-worth individuals. While we have a range of index-based mutual funds, we felt that it was important to have an ETF offering, and our NETS ETFs have been developed to provide an efficient way for US investors to gain access to global markets. It was important to us that NETS bring something new to the ETF marketplace, and we believe that our 'flagship index' approach is unique, and it has attracted much interest and support from the investment community
Why did you choose TOPIX as opposed to other Japanese indexes?
Schoenfeld: As a large manager of Japanese equities for global clients, we are familiar with the various benchmarks for Japan's stock market. To fit with our NETS 'flagship local index' strategy, TOPIX was a natural choice, as it is cap-weighted, is the underlying index for a widely-used stock index futures contract, and is well-known globally. It is also very important for us to partner, wherever possible, with the financial community and exchange, and we can think of no better partner that the Tokyo Stock Exchange. Speaking both personally, and on behalf of Northern Trust, we are deeply honored to be entrusted by the TSE to introduce the TOPIX ETF to the US marketplace
Could you tell us your plans for the ETF business going forward?
Schoenfeld:Our first priority is to roll-out the full set of NETS single-market ETFs. Since our launch of 'TYI' in April, we've built the NETS family to 15 ETFs, including interesting markets such as Hong Kong (based on the Hang Seng Index), Singapore (based on the Straits Times Index), Germany (based on the Deutsche Borse's DAX Index), South Africa (on the Johannesburg Stock Exchange Index), Ireland (based on the Irish Stock Exchange Index), Israel (based on the Tel-Aviv Stock Exchange Index). We hope to expand this initial family in the coming months by adding new ETFs for other relevant markets. In the longer-term, we will explore overseas expansion of our NETS initiative, possibly including the cross-listing of some of our NETS ETFs on other exchanges. In this context, we are encouraged by the TSE's commitment to expand the number of ETFs listed in Japan
ETFs are index-tracking funds that are traded on an exchange like stocks. Investors can enjoy the performance of the component stocks in the underlying index though investing in an ETF product. TOPIX-ETF is one of the largest ETFs in Japan and three TOPIX-ETFs are actively traded on the Tokyo Stock Exchange, Inc. Total assets under management of TOPIX-ETFs in Japan amount to approximately USD 23 billion as of June 30, 2008.