The Investment Association (IA) last week thrust exchange-traded funds (ETF) into the spotlight by revealing they could be included in its sector classifications.
Under the IA’s proposals, more than 200 ETFs would be eligible to apply for inclusion in any one of its 37 fund sectors.
In theory, the move will benefit investors by allowing them to make better comparisons between active and passive funds, but the consultation has split the industry.
Below four experts give their views on the IA’s consultation and what it may mean for the industry.
Hector McNeil, co-CEO of HANetf:
“We think this consultation from the IA shows a great deal of foresight and we welcome the move. The fact is most investors have a variety of both active and passive strategies in their portfolios, including ETFs, and by including them in comparison tables it will enable investors to gain a better understanding of how their portfolios are performing.
“Improving transparency in this way can surely only be a good thing for end investors, and we hope the scope of ETFs included can also be widened over time.
“The next generation of ETFs, such as thematic, smart beta and eventually active products, will sit very well in this initiative. These new ETFs will be much more focused on after fee performance rather than just being judged on how low the fees are, so to have them alongside active funds makes a lot of sense.”
Laith Khalaf, Senior Analyst at Hargreaves Lansdown:
“More industry data on ETF flows and performance would be welcome, but they shouldn’t be co-mingled with daily priced funds, as investors tend to look at these two structures separately, and indeed many investors only look at one of the other.
“Putting the two together would create more heterogeneous sectors, which makes them less relevant for fund buyers. Indeed, some sectors already suffer significantly from this issue. On balance, the idea of having separate sectors for ETF performance makes the most sense.”
Adrian Lowcock, Head of Personal Investing at Willis Owen:
“I am not convinced the inclusion would be a good move. The IA sectors look at funds, not ETFs and investors need to be confident of that. The majority of ETFs are still used by professional investors who can already assess performance relative to active or passive peers.
“Naturally, this would be welcome by the ETF community but it would make the IA sectors less useful for fund investors. Perhaps a separate set of categories for ETF’s so investors can choose whether to look at the two together.”
Darius McDermott, managing director of Chelsea Financial Services:
“I don’t mind ETFs going into the sectors as long as they are comparable and it helps fund selectors make choices.
“However, there are some issues which need addressing. Firstly, because they are live priced, the IA will need a mechanism to make sure the data is comparable to funds which only price once a day.
“Also, the pricing you get on funds includes underlying charges, whereas ETFs don’t. Quite simply, that needs to be resolved, and unless you can compare them on a like-for-like basis then it will not work.”