Edhec-Risk
Indices and Benchmarking - July 15, 2011

Investors have become more sophisticated in their use of ETFs - an interview with Valerie Baudson

In this month's interview, we talk to Valérie Baudson, Managing Director, Exchange Traded Funds at Amundi, about the ETF market in Europe, the risks of ETFs and their replication methodologies, how to ensure adequate liquidity for ETFs, and the main criteria to take into account when selecting ETFs.


Valerie Baudson

EDHEC-Risk Institute is currently launching the 2011 edition of the annual European ETF Survey which is part of the Amundi ETF research chair on "Core-Satellite and ETF Investment". How do you think the ETF market in Europe has changed since last year's survey?

Valérie Baudson: The European ETF market has continued to witness consistent growth and is becoming less concentrated as more recently arrived players gain market share from the historical providers. We have entered a new phase of development with a number of new entrants entering the fray.

Understanding of the product has also matured as investors have become more sophisticated in their use of ETFs and look more carefully at quality indicators such as tracking error.

As far as expectations in ETFs are concerned, last year’s annual survey showed an increasing appetite for new products, especially in the areas of fixed income and emerging markets. ETF providers have responded to this demand, and this is particularly true at Amundi ETF, by launching numerous products on asset classes such as corporate bonds, emerging government bonds and emerging equities.

All these factors have led to increased competition, which I believe is very positive for investors: ETF issuers are working towards providing better quality funds at lower cost.

Over the past year, Amundi Group has been very successful in establishing its position in the European ETF market, rising to third place in terms of net new assets in Europe ($2.2bn over the first five months of 2011), a market share of 14% of new business as of 31 May 20111.

A recent full-page article in the Financial Times drew attention to the potential risks of ETFs, and you were quoted notably as saying that ETFs are well-regulated and as such should not be compared to credit derivatives. How would you characterise the risks to which ETFs are exposed?

Valérie Baudson: First of all, it is essential to differentiate between ETFs, which are UCITS-regulated funds, and other exchange-traded products (ETNs, ETPs, ETCs) which do not adhere to the same strict guidelines in terms of index structure methodology, diversification ratios, counterparty risk, disclosure requirements and documentation.

Having said that, as with any investment product, ETFs are exposed to certain risks and ETF providers have to disclose these in full to their clients. Recent reports have highlighted the requirement for both improved transparency and a clearer understanding of the nature and level of risks related to ETFs, whatever their structure, particularly in the areas of liquidity and counterparty exposure.

One area of the survey that is covered more extensively this year is the replication methodology. Where do you stand on the relative merits of physical replication, statistical replication and synthetic replication?

Valérie Baudson: As of end May 2011, the European ETF market is split between physical (56%) and swap-based replication (44%)1.

In physical replication, the fund either holds all the components of the index (“full replication”) or a representative sample of them (“sampling replication”). This method may involve the use of stock lending or borrowing, generating counterparty risk exposure.

The other method widely used is swap-based replication. This method is on an upward trend in Europe, and favoured by Amundi ETF, mainly due to the fact that it provides efficient replication, low tracking error and cost optimisation. Swap-based ETFs are divided into two legal structures:

  • “Funded swap” structure, where the fund transfers cash to the swap counterparty, who provides the total return of the index replicated and posts a “collateral”. In this set-up, the fund does not own the collateral assets.

  • “Unfunded swap” structure, where the fund purchases securities and swaps their performance against the total return of the replicated index. The portfolio of securities is directly owned by the fund. These assets are immediately available for sale in case of default by the swap counterparty.

The quality of the assets held is therefore crucial. Amundi ETF products are invested in mainly European bluechips for Equity ETFs and investment grade bonds for fixed income ETFs, and only use an unfunded swap structure2.

What for you are the key elements in ensuring adequate liquidity of ETFs?

Valérie Baudson: First of all, it is important to point out that the liquidity of an ETF is not linked to its size, number of shares traded per day or type of replication but directly depends on the liquidity of the underlying securities in the index. This is a key point that we consider carefully at Amundi ETF, especially when creating new products, to ensure that the underlying index is sufficiently liquid and diversified.

In Europe, as the large majority of transactions on ETFs are negotiated Over The Counter (OTC) through one or several market makers, the volume observed on the order book reflects only a small portion of orders placed on ETFs.

The role of the market makers is crucial in ensuring liquidity, as they are committed to offering purchase and sale prices (bid/ask) during market hours and are organised to manage very large volumes of trades to allow investors to buy and sell their ETFs whenever required.

The bid/offer spread is thus a cost component as well as a key indicator of liquidity. The tighter the bid/ask spread, the more the investors can buy or sell their ETFs at a price close to the indicative NAV (excluding brokerage costs).

Amundi ETF ensures high liquidity through more than 40 market makers who actively trade the products. These market makers have been carefully selected for the quality of their service and their reputation on international markets.

What are the most important criteria to take into account when selecting ETFs?

Valérie Baudson: One of the first elements that is examined by investors is cost. The most obvious component of this is the TER (Total Expense Ratio), as it is deducted directly from the NAV and has a direct impact on tracking error. Investors also look closely at bid/offer spreads on the order book.

Of course, the quality of replication is the other key factor of performance. Investors analyse important indicators such as tracking error, dividend optimisation, the type of indices being replicated, and the quality of counterparties.

Finally, the reputation of the ETF provider and its capacity to provide a comprehensive and consistent range of products is also decisive in the selection process.



  1. Source: BlackRock, ETF Landscape Industry Highlights End May 2011
  2. Three products in the Amundi ETF range, Amundi ETF CAC 40, Amundi ETF S&P Euro and Amundi ETF S&P Europe 350, use the physical replication method.



About Valérie Baudson

Valérie Baudson has been Managing Director, Exchange Traded Funds at Amundi since December 2007.

From 2004 to 2007, Valérie was Marketing Director and Member of the European Management Committee of Crédit Agricole Cheuvreux, the European Stockbroking subsidiary of Crédit Agricole Group. From 2001 to 2004, she held the position of Corporate Secretary and was a Member of the Management Committee. Valérie joined Crédit Agricole Cheuvreux in 1999 as Project Manager for the Senior Management team. Valérie started her career at Banque Indosuez where she managed international audit missions from 1995 to 1999.

Valérie is a graduate from HEC (Haute Ecole de Commerce, Paris) where she majored in Finance.


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