Industry coalition champions clarity through ETP classifications
A coalition of leading asset managers has launched an initiative that calls for clearer identification and categorisation of exchange-traded products (ETPs).
The coalition has asked Cboe, Nasdaq and NYSE to implement a solution that more accurately reflects the complexities, risks, and structural features inherent in different types of ETPs.
The majority of ETPs are classified as exchange-traded funds (ETFs) under the proposed ETP classification, accounting for nearly 96 per cent of the USD3.65 trillion US ETP AUM and 77 per cent of the 2,400 products. The approximately 550 remaining ETPs offer investors a variety of different exposures and strategies, including those with leveraged or inverse returns. Due to the absence of an ETP classification system, ETF has become a blanket term for a range of products that can lead to significantly different outcomes for investors.
The financial institutions collaborating on this industry-led initiative manage approximately 90 per cent of the U.S. ETP market and include BlackRock, Charles Schwab Investment Management, Inc, Fidelity Investments, Invesco, and State Street Global Advisors.
“At its core, this effort is about increasing transparency for investors,” says Samara Cohen, Co-Head of iShares Global Markets and Investments at BlackRock. “One of the benefits of ETPs is the breadth of access they offer to the world’s investment markets. However, the presence of multiple product structures can be confusing and through this initiative we want to introduce a shared language to help investors know what they own.”
After extensive discussions and evaluation, the coalition has developed a naming convention that aims to better reflect the underlying strategies of the product: exchange-traded funds (ETFs), exchange-traded notes (ETNs), exchange-traded commodities (ETCs) and exchange-traded instruments (ETIs). For more information.
“As the ETP industry continues to mature, the classification and categorisation of the ETP product structure should mature as well, ensuring that investors have a clear view of the differentiation between an ETF, and other structures like ETNs, ETCs and ETIs,” says Anna Paglia, Head of Legal, US ETFs at Invesco.
“Investors have embraced the transparency proposition offered by ETFs in that it enhanced their ability to make better informed investment decisions,” says Rory Tobin, Global Head of SPDR ETF Business at State Street Global Advisors. “As the ETP industry has grown, and new and innovative structures have emerged, a robust industry categorisation system is required, providing investors with a toolkit to better inform their decision making as to the risk characteristics inherent in different ETP structures.”
In September 2019, the Securities and Exchange Commission (SEC) unanimously approved Rule 6c-11 (the ETF Rule) to help support future ETF growth and increase ETF market transparency. While the SEC did not include an ETP classification scheme as part of the final ETF Rule, the Commission encouraged market participants to continue engaging with their investors, with each other, and with the SEC on ETP classifications.