A spokesperson for the regulator has cited two factors it needs to know more about
The International Organization of Securities Commissions (IOSCO) has announced plans to scrutinise the US$4tn ETF industry.
The global regulator’s move to clarify various ETF-related issues comes after a call from the central bank of Ireland – the latest country to express its concerns on the space, according to the Financial Times.
French regulators are discussing proposals to bolster rules surrounding the products. The US Securities and Exchange Commission launched a broad review in 2015, but has not yet published any conclusions.
“There has been huge growth in ETF assets and a proliferation in the different types of ETFs,” IOSCO Secretary-General Paul Andrews told the publication. “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.”
The rise of ETFs has seemed virtually unstoppable over the past few years, with investors pumping US$2.6tn in new cash into the space over the past decade. BlackRock, the world’s largest asset manager, enjoyed US$89bn in net new inflows through its ETF arm iShares just last month.
“Investor sentiment, not ETFs, drives markets,” said the firm, rejecting suggestions that ETF growth is a threat to market stability. “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.”
High fees and lacklustre performance have turned many investors off to active mutual funds, inspiring a large-scale migration into low-cost passive ETFs. This has helped drive a substantial growth in the space, which is why IOSCO now wants to update its 2013 evaluation of the space.
Some analysts understand the motivation, but nevertheless consider it misplaced. “Nothing has happened to suggest that anything is going wrong with ETFs in Europe,” said Nizam Hamid, head of ETF strategy at WisdomTree Europe. “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.”
With ETF inflows increasing in concert with a rally that has brought the US and UK equity markets to all-time highs, concerns of ETF-fuelled bubbles have been brought up. Some estimates peg passive management’s share of the US equity market at around 40%, prompting questions about ETFs’ effects on the efficiency of the stock market.
One major study, however, suggests there is no reason for alarm. Analysing shareholder data from major listed companies, US-based Citigroup found just 22% of shares for sale in the US equity market held in passive funds, with stock ownership by passive funds outside the US significantly lower.
“It is difficult to find major market distortions created by the rise of passive investing,” said Robert Buckland, global strategist at Citigroup.
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Related stories:
Investors demanding lower-cost funds
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The global regulator’s move to clarify various ETF-related issues comes after a call from the central bank of Ireland – the latest country to express its concerns on the space, according to the Financial Times.
French regulators are discussing proposals to bolster rules surrounding the products. The US Securities and Exchange Commission launched a broad review in 2015, but has not yet published any conclusions.
“There has been huge growth in ETF assets and a proliferation in the different types of ETFs,” IOSCO Secretary-General Paul Andrews told the publication. “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.”
The rise of ETFs has seemed virtually unstoppable over the past few years, with investors pumping US$2.6tn in new cash into the space over the past decade. BlackRock, the world’s largest asset manager, enjoyed US$89bn in net new inflows through its ETF arm iShares just last month.
“Investor sentiment, not ETFs, drives markets,” said the firm, rejecting suggestions that ETF growth is a threat to market stability. “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.”
High fees and lacklustre performance have turned many investors off to active mutual funds, inspiring a large-scale migration into low-cost passive ETFs. This has helped drive a substantial growth in the space, which is why IOSCO now wants to update its 2013 evaluation of the space.
Some analysts understand the motivation, but nevertheless consider it misplaced. “Nothing has happened to suggest that anything is going wrong with ETFs in Europe,” said Nizam Hamid, head of ETF strategy at WisdomTree Europe. “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.”
With ETF inflows increasing in concert with a rally that has brought the US and UK equity markets to all-time highs, concerns of ETF-fuelled bubbles have been brought up. Some estimates peg passive management’s share of the US equity market at around 40%, prompting questions about ETFs’ effects on the efficiency of the stock market.
One major study, however, suggests there is no reason for alarm. Analysing shareholder data from major listed companies, US-based Citigroup found just 22% of shares for sale in the US equity market held in passive funds, with stock ownership by passive funds outside the US significantly lower.
“It is difficult to find major market distortions created by the rise of passive investing,” said Robert Buckland, global strategist at Citigroup.
For more of Wealth Professional's latest industry news, click here.
Related stories:
Investors demanding lower-cost funds
Advisors doubling down on smart-beta bets
