Many investors are looking to ETFs as a cheap method of accessing assets such as commodities, but there have been claims that the products are difficult to understand, riskier than they appear and are detrimental to the rationality of markets. "The reality is the ETF is an access product, providing access to a wider range of commodities at an affordable price. It’s wrong to think of it as a foreign product," countered Lansing.
"It’s not a distortion of the markets; it’s just that more people are trading the underlying. Quite simply, it’s another way of trading a product."
Frances Hudson, global strategist at Standard Life Investments, told FE Trustnet last week that the products frequently lack transparency and display all of the features that were blamed for the 2008 financial crisis; however, Lansing says she couldn’t be further from the truth.
"There is far greater transparency with an ETF than with an investment fund, particularly when it comes to charges," he claimed.
"RDR will likely make people more aware of the fees they are paying to active managers for performance that frequently is worse than the market and this could be a positive for ETPs."
Lansing says that some of investors’ concerns may come from a failure to understand the product and the underlying it is tracking. He offered a checklist for them to follow. "The first thing is to make sure you understand the asset class the product holds," he said.
"Certain commodities like natural gas trade on a futures basis, which means the price of the ETFs will not track the price of the commodity."
"Investors might see that their ETF is up 6 per cent while the price of gas is up 10 per cent and think they’re missing out, but the reality is this is a well-understood phenomenon and is simply how the market works."
"If you’re investing in these commodities, you need to make sure you understand these mechanisms of contango and backwardation. Other commodities like precious metals are much simpler."
"The second thing is to look at the structure – is the product a UCITS fund? UCITS funds have a high level of corporate governance and transparency. If your product is not UCITS, you need to ask why."
"Sometimes there are legitimate reasons – for example some of our products aren’t UCITS funds because you can’t get UCITS status for a product tracking a single commodity."
"Finally you need to ask if the product is physically backed."
This issue of physical ownership is one of the most controversial with regard to ETFs, with synthetic versions of the products accused of further increasing risk.
Furthermore, ETFs that don’t have UCITS status use special purpose vehicles (SPVs) to buy the assets, meaning that the investor has to consider the credit risk.
"You need to ask what your credit risk is to the issuer and to any sponsor, because with an ETC [exchange traded commodity], what you hold is a debt instrument," Lansing continued.
"We try to create contractually the bankruptcy protection you get in a UCITS fund, so the SPV assigns all the rights in the underlying to a third-party trustee, meaning that no-one else apart from the investor has rights to it."
"None of the other creditors, if there were any, would get to it apart from the holders of the notes."
If the product isn’t physically backed, Lansing explains that it is critical to understand its structure and any possible credit risk.
As long as investors have done their homework and have matched their own risk profile to that of the product, there is no reason to fear ETFs, he finished.