The global exchange traded fund (ETF) industry has in some ways become a casualty of its own success.
A strong entrepreneurial spirit combined with product innovation has helped the industry reach a critical mass where it is rapidly gathering assets. The speed of the industry’s growth, however, has left it somewhat unequipped to deal with a torrent of primarily misguided criticism about ETFs as their use has become more prevalent.
In May, three Canadian providers – BMO Exchange Traded Funds, Claymore Investments and Horizons Exchange Traded Funds – launched the first national industry association in the world, the Canadian ETF Association (Cetfa).
Our mandate is simple. We are going to educate individual and instutional investors as well as the adviser community on the benefits and uses of ETFs, provide industry statistics and commentary to the Canadian financial media as well as advance industry issues with regulators, government agencies and interested third parties.
The first goal is to create more awareness about ETFs and to provide greater depth of education to investors about their usage. The second goal is to deal with industry-specific issues, whether they are regulatory or structural.
Cetfa can take an activist role on behalf of all ETF providers to improve industry practices and defend the positions of member firms.
The ETF industry is still very much in its infancy considering its size and its broader influence to other spheres of investment management. This includes the mutual fund industry, which is more than ten times the size of the ETF industry in Canada and has much greater resources at its disposal to influence investment discourse.
It can be a daunting task for one provider on its own to champion the merits of ETFs to Canadian investors. An association, on the other hand, is able to pool resources so that it has real strength and, more importantly, legitimacy when it addresses issues that impact the broader ETF industry.
While certain facts on how ETFs work are second nature to those in the industry, it is very much new to the majority of investors and members of the financial media across the globe. In our view, the biggest challenge to the growth of ETF usage is a lack of education about how these products work and how to best use them.
Many individual investors and advisers are only beginning to view ETFs as part of their investment toolkit. While more investors are embracing ETFs, the structure itself is starting to be used for a much broader range of investment strategies than the initial equity index tracking strategies ETFs are most commonly associated with.
The vast majority of the innovation happening on the product side of ETFs is beneficial for investors since it is effectively a democratisation of the investment space, where strategies previously only available to institutional investors are now accessible to individual investors.
We are asking many investors to not only get their heads around what an ETF is and how it works, but to also understand the nuances of product evolution. This includes the development of synthetic ETFs and actively managed strategies.
It is, therefore, necessary for an arm’s length association to step in and educate investors and regulators about ETFs on a wide variety of topics.
The past couple of months have been challenging for the global ETF industry. Criticisms about ETF structure in both Europe and the United States, whether warranted or not, has had a cascading effect where ETFs are under scrutiny in every country they are listed.
Though most financial regulation is regional, the majority of the ETF providers in the world are international, as is the usage of their ETFs.
In the absence of any independent authority on ETFs – a role an association can fulfill – explaining what is happening in the ETF industry has been largely left to third-party commentators. Those may or may not have a self-serving agenda.
Instead of working together, ETF providers sometimes end up working against each other, which can undermine our common goal of improving and increasing ETF usage.
In Canada, we have regulations that are different from those in Europe and other jurisdictions. We needed an organisation to explain the contrast to regulators and the media.
We are working actively to build consensus as an industry and work with regulators on best practices for the industry. A European association would likely be able to do the same and would be valuable in defending the merits of its own system, combating myths and misinformation about ETFs that are hindering the growth of their usage.
The industry is competitive and not all providers are going to be on the same page with every issue, but on most there is agreement. Building this consensus helps us all in achieving our goal of creating a better ETF industry that serves the best interests of all investors.
Howard Atkinson is chair of the Canadian ETF Association
©2011 funds europe