$4tn exchange traded fund industry draws more scrutiny
Global securities body is latest regulator to examine fast-growing sector
The global umbrella body for securities regulators is to scrutinise the $4tn exchange traded fund industry, the latest supervisor to examine a fast-growing sector that is playing an increasingly influential role in financial markets.
The move by the International Organization of Securities Commissions follows this month’s call by Ireland’s central bank for greater clarification on issues such as ETF ownership and pricing.
Regulators in France are discussing proposals to strengthen the rules governing these funds, while the US Securities and Exchange Commission launched a wide-ranging review of ETFs in 2015 but has yet to publish any conclusions.
Strengthening the resilience of capital markets globally is a central objective for Iosco under Paul Andrews, the veteran US regulator who moved to Spain a year ago to become secretary-general of the Madrid-based organisation.
“There has been huge growth in ETF assets and a proliferation in the different types of ETFs. Plain vanilla ETFs that track indices have been around for some time but we are now seeing more leveraged and inverse ETFs as well as derivative-linked synthetic ETFs. The growth and leverage are two ingredients that we need to know more about,” said Mr Andrews, speaking exclusively to FTfm during a visit to London last week.
Investors have ploughed around $2.6tn in new cash into ETFs over the past decade. Inflows accelerated following the global financial crisis in 2008 and the ETF industry has attracted record new business in four of the last five years.
Net new inflows for iShares, the ETF arm of BlackRock, the world’s largest asset manager, reached $89bn by the end of April, almost triple the pace of growth over the same period last year. It rejected any suggestion that growth in ETFs could destabilise any financial market.
“Investor sentiment, not ETFs, drives markets. While the popularity of ETFs is growing rapidly as more and more investors discover their benefits, ETFs are still a very small portion of the vast assets in global stock, bond and commodities markets,” BlackRock said.
Rising disenchantment with the high fees and poor performance of actively managed mutual funds has helped spur growth of low-cost ETFs this year. Inflows in the first four months of 2017 reached $235bn, according to ETFGI, a London-based consultancy.
Nizam Hamid, head of ETF strategy at WisdomTree Europe, the ETF provider, said it was “understandable” that Iosco wanted to evaluate recent developments, as the ETF market had grown substantially since the regulator conducted its previous review in 2013.
“Nothing has happened to suggest that anything is going wrong with ETFs in Europe,” said Mr Hamid. “The ETF industry is still relatively small compared with actively managed funds and other passive index-trackers, so the influence of ETFs on financial markets is sometimes misunderstood.”
Rising investor inflows have coincided with the US and UK equity markets rallying to all-time highs this year, prompting concerns that ETFs could be helping to fuel unsustainable price bubbles.
The shift out of actively managed mutual funds and into ETFs is most pronounced in the US. Some estimates suggest around 40 per cent of equity assets under management in the US are now passively managed, raising questions about whether ETFs could be damaging the efficiency of the stock market.
However, an analysis of shareholder data for big listed companies by Citigroup, the US bank, found that just 22 per cent of the shares available for sale in US equity market were held by passively managed funds. Stock ownership by passive funds outside the US is significantly lower and there is no clear evidence to suggest share prices have been influenced by the growth of ETFs.
“It is difficult to find major market distortions created by the rise of passive investing,” said Robert Buckland, global strategist at Citigroup.