ETF Industry Hopes CBI Paper Will 'Put ETF Misconceptions To Bed'

by: Deborah Fuhr

Summary

Industry participants have welcomed the CBI’s latest ETF discussion paper, hoping it will not only help investors but put some ETF misconceptions to bed.

As ETF uptake continues, the CBI wants to examine whether retail investors’ expectations are realistic and in what market conditions fund performance might struggle.

The paper covers many topics including ETF liquidity, pricing, ownership, whether ETF and non-ETF share classes can be held within the same fund structure, transparency and active ETFs.

Industry participants have welcomed the Central Bank of Ireland's latest ETF discussion paper, hoping it will not only help investors but put some ETF misconceptions to bed.

As ETF uptake continues - now a $4 trillion market - the CBI wants to examine whether retail investors' expectations are realistic and in what market conditions fund performance might struggle.

The paper covers many topics including ETF liquidity, pricing, ownership, whether ETF and non-ETF share classes can be held within the same fund structure, transparency and active ETFs.

Cormac Commins, partner at Irish law firm William Fry, which is contributing to the paper, said the review would be an opportunity to highlight and resolve potential issues as well as "put some discussions to bed".

"One example is the primary dealing mechanism: are there any risks? The bank is focused on the unique dealing structure which conventional funds don't have," he said.

"There could be perceived risks in [dealing in] primary and secondary markets and the CBI wants to know if investors understand where they are dealing and what their position is."

Another "positive outcome", he added, would be to analyse ETF and non-ETF share classes in the same fund structure, a topic which providers have long discussed.

This view was supported by Andrew Craswell, Vice President at Brown Brothers Harriman.

"This is an area of great interest to a number of asset managers as it would potentially drive greater efficiency and scale in their funds," he said.

"While this is certainly operationally possible, the paper seeks views around the fair treatment of shareholders across different share classes [such as the] ability to exit the investment intraday."

The CBI paper will also address the merits and transparency of active ETFs, which may help open up the market for a type of fund which has seen limited success in Europe. Active ETF assets reached $6.53 billion in the region as of February compared to $47.49 billion in the US, according to ETFGI data.

"This [topic] will be of great interest to active asset managers who are looking to create active ETFs as they will undoubtedly have concerns about daily portfolio disclosure," said Craswell. Active ETFs do not list their portfolio holdings online like their non-active counterparts.

Liquidity was another main issue for the CBI, and Craswell said it was the "most forward-looking" section.

The CBI aims to assess several contested topics: whether ETFs could begin to drive the underlying liquidity of the securities they invest in, if ETFs could create a dislocation in the price of the fund and the value of what the fund holds, and whether ETFs can be used for price discovery during market stress, as was the case in Greece in 2015.

Allan Lane, managing director at Twenty20 Investments, said the CBI report might go even further than MiFiD II by requiring ETF trades to be reported at both the exchange level and over the counter.

In Europe, around 70 per cent of ETF trades are over the counter, giving a "false sense of concern about liquidity levels", he said.

One potential concern for Lane was the focus on whether ETF providers should help prop up the market when liquidity dries up.

Lane argued that although central banks bought securities to help liquidity during an era of quantitative easing, ETF providers should not act in the same way as it would provide a "false market and it goes against the principle of transparency."

The CBI encourages industry participants to give their feedback until 11 August.

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