The Investment Association (IA), the trade body that represents the UK’s fund management industry, has opened a consultation on the proposed inclusion of exchange-traded funds in its fund classification sectors.
Galina Dimitrova, Director of Investment and Capital Markets at the IA.
The IA’s 37 fund sectors provide a way of dividing funds – around 3000 are currently included – into broad groups based on factors such as asset class, investment strategy and geographical region.
The sectors are designed to help investors and advisers compare and contrast similar funds.
Under the IA’s proposal, ETFs would be eligible to apply to be included within the existing sectors. Consistent with the current approach, only ETFs that are either UK domiciled, or are EU UCITS with HMRC reporting fund status would be included.
Commenting on the decision to launch the consultation, Galina Dimitrova, Director of Investment and Capital Markets at the IA, said, “We are continually monitoring the fund market to ensure that the IA sectors reflect the wide range of products the asset management industry has to offer savers. The primary purpose of the IA sectors is to serve the needs of consumers and their advisers and the addition of ETFs must be done in their best interests.”
Feedback from market participants has been mixed.
Ryan Hughes, head of active portfolios at fund platform AJ Bell, was sceptical.
He said, “ETFs are an investment structure, they are not a way of investing and therefore if you’re adding ETFs why are you not adding investment trusts? If what you’re doing is saying let’s have one sector for all funds, then it should include ETFs, funds and investment trusts, and surely that’s what they are saying here. If the IA are doing this for the sake of adding a load of passive funds to sectors then that just adds more confusion for investors.
“The inclusion of passive funds will mean that where you have got lots of passive funds in a sector they will occupy the bottom of the second quartile and the top of the third quartile, and active funds will sit above and below that – and that feels like a move that will create confusion for investors.”
Hector McNeil, co-CEO of ETF white-label platform HANetf, was more positive.
“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,” said McNeil.
He added, “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.”
The consultation will close on 1 February 2019 and respondents are invited to comment on the potential benefits and drawbacks of including ETFs, as well as the best means for their inclusion.