Skip to the content

Investment Association consults on including ETFs in sectors

30 November 2018

The trade body will ask its members whether it should allow classification of exchange traded funds in its sectors.

By Maitane Sardon,

Reporter, FE Trustnet

In reflection of the increasing usage of exchange traded funds (ETFs), the Investment Association is opening a consultation to gather views on whether it should allow these vehicles to be classified within its sectors,. 

Under the IA’s proposal, over 200 ETFs would be eligible to apply to be included within the existing sectors.

Consistent with the current approach taken by the IA, only ETFs that are either UK domiciled, or are EU UCITs with HMRC reporting fund status, would be included.

Products such as exchange traded notes (ETNs) or exchange traded commodities & currencies (ETCs) – that have different structures and are subject to different regulations – won’t be considered for entry to IA sectors.

The consultation, which is open to the wider public, comes after the IA Sectors Committee proposed earlier this year that ETF should now be admitted to the trade body’s sectors.

“It is recognised that fund buyers and distributors are influenced by whether or not a fund has been admitted to IA sectors; not least as funds are often compared on their performance relative to their competitors and commonly the performance tables prepared by data vendors and buyers will either be based upon or benchmarked to the IA sectors and sector average performance,” noted the IA on the official consultation paper.

The decision to launch a consultation, which has overall been welcomed by industry experts, hasn’t taken many by surprise.

James Budden, director of retail marketing and distribution at Baillie Gifford, said: “This seems sensible as investors should have the whole picture. Active managers should not be afraid of this move if they are truly different from the index and can offer significant outperformance over time. It will help investors sort out the managers who are actually active from the rest.”

Darius McDermott, managing director at Chelsea Financial Services, said he has “no problem” with the move – so as the ETFs included in IA sectors are generally comparable to their unit trust and Oeic counterparts.


He added: “The IA sectors are there to help people make like-for-like comparisons. That doesn’t mean like for like is exactly the same, because even in the UK All Companies sector there are over 300 funds that are multi-cap funds, mid-cap funds, trackers, ethical funds, etc.

“The only comparative thing is that they are all UK equities so if in their sector they include ETFs that are based in UK equities and are comparable then that would make sense.”

However, according to Ryan Hughes, head of active portfolios at AJ Bell, the potential addition of ETF to the Investment Association’s sectors runs the risk of adding more complexity for investors.

“While passive investing has grown significantly in recent years, the expansion of the sectors to include so many ETFs doesn’t in my view assist customer choice or understanding,” Hughes noted.

“We may well have reached the tipping point in some sectors where there will be so many passive funds that it is appropriate to strip them out into their own passive sector.”

When it comes to the potential of the inclusion of ETFs to affect performance of the existing funds in the sector, the Investment Association has considered issues such as impacts on past performance, sector average and ranking data.

“Of course, any new fund alters the existing set of funds and it is not our intention to be swayed by individual impacts to particular funds,” it noted.

Change in sectors’ performance after ETF inclusion

 

Source: The Investment Association

“In this case we have considered impacts on sectors as a class as at least three issues could be different here than would arise in day-to-day business of maintaining the sectors.

“Firstly, the relatively large number of newly admitted funds on one day in some sector; secondly, the possibility that the ETFs will be more tightly clustered in performance if many focussed on the same index; and finally distinctions in the mechanisms for pricing the shares held by investors.”


The IA said greatest potential for change in the sectors considered in their analysis is IA Europe including UK, with some funds moving up 7 per cent in terms for their ranking relative to their peers and others down 8 per cent. In several sectors the ranking moves are within a few percentage points.

Based on that analysis, the Investment Association does not envisage disruption to the utility of the sectors themselves.

Percentage change in ranking likely to be seen by existing funds in sectors

  Source: The Investment Association

As Chelsea Financial Services’ McDermott noted, some “old-style trackers” already exist in certain peer groups, such as the IA UK All Companies sector.

“If we take the UK All Companies sector, for example, there are already what you would call the old-style FTSE 100 trackers, which are mid-cap trackers,” he said.

“If there is a standard ETF based on UK equities and goes into the all companies sector it’s fine, if it’s a smart-beta ETF based in UK equities it’s fine, but if something goes in there which is 3x levered then it is not comparable.

“If its levered or it’s got a number of features which makes it different then it wouldn’t be fine.”

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.