23 Oct 2018

Eurex Exchange

Interview with BlackRock and Morgan Stanley on IGLN Options – Part 1

IGLN options, a natural alternative for gold market exposure

By launching options on the iShares Physical Gold ETF (IGLN), Eurex and BlackRock responded to growing customer demand for listed, UCITS compliant contracts to access the gold market. Eurex introduced the IGLN options on its market in May 2018.

In a discussion with Gabriel Manceau, Index Derivatives trader at Morgan Stanley & Co International plc, and Alexandre Roubaud, running Secondary and Options markets for iShares EMEA, Eurex spoke with market participants to understand the opportunities available for investors to trade IGLN options, how to incorporate them in trading strategies and what the future for IGLN options holds.

Question: Gold ETFs offer investors a natural alternative in exposure to the gold market for investors not interested in physical delivery. The IGLN ETF with more than USD 3.5bn in AUM has been the fastest growing Gold ETP in Europe. What has been the driver of this growth?

Alexandre Roubaud: Lately, all sorts of investors are looking at gold to diversify their portfolio, partly due to the ongoing international trade tensions. IGLN is an excellent tool for this, not in the least because it has one of the lowest TERs at 25bps. Volume and spread size also add to its attractiveness. Assets in the fund have increased 17 times over the past three years while the average bid/offer spread has fallen below 3bps. As a matter of fact, the IGLN was the most actively traded product on the LSE on 2 July, even pulling ahead of blue chips like HSBC and BP.

Question: Other ETFs allow investors to purchase a basket of gold mining companies – firms that are involved in the exploration, development, and production of gold. How does this compare to investing in gold itself?

Alexandre Roubaud: Those baskets would tend to have a higher correlation to the equity market and thereby carry equity beta risk. If the broad equity markets fall, gold mining stocks typically fall as well. The correlation though between physical gold and equities tends to be lower, which means that gold could be a more effective portfolio diversifier. Just look at the numbers. The 120-day correlation between Gold and DM equities (MSCI World) is 0.104 while the 120-day correlation between Gold Miners and DM equities (MSCI World) is much higher at 0.31.

Gabriel Manceau added: At first glance, you would think that a gold mining stock would be correlated to the price of gold as the gold price would directly impact its turnover. However, equities also have exposure to other factors such as regulation, internal management and costs independent of the gold price.

Question: Morgan Stanley provides on-screen liquidity in the recently launched IGLN options. How vital is such a role, especially at a very early stage?

Alexandre Roubaud: I would draw a parallel between the ETF cash and ETF options market. MiFID II has created greater post-trade transparency and it confirmed that the estimate we have always used, that about two-thirds of European ETF trading takes place OTC, was correct. However, we see a trend that orders are being routed towards the electronic platforms as the market matures. The UCITS ETF options market is a much newer business. As a result, roughly 95% of trading is either done OTC or via block trades. That high percentage is mainly because the number of listed ETF options is still low, but the fact is, right now, screen liquidity is more important for price discovery and negotiation than for actual execution. Nonetheless, as the European ETF options business matures, we expect more on-screen activity, much like the underlying ETFs. This will be essential in achieving fuller pre-trade and execution transparency.

Gabriel Manceau: Having on-screen liquidity is critical. It provides indicative fair value and investors can manage expectation on the bid/offer spread expected in block trading. Investors can also observe option price volatility before starting trading.

Gabriel Manceau, Index Derivatives trader,
Morgan Stanley & Co International plc

Alexandre Roubaud, running Secondary and Options markets for iShares EMEA, BlackRock

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