BlackRock, owner of exchange-traded fund (ETF) provider iShares, is calling for new global standards of transparency and disclosure for ETFs.
ETF has become a blanket term describing many products that have a wide range of different structures. Arguing that this is confusing for investors, BlackRock wants global regulation to force the exchange-traded funds industry to explain product differences better to investors.
BlackRock proposes that exchange-traded products (ETP) should be the broad term used to describe any portfolio exposure product that trades on an exchange. By contrast, ETF should refer only to a specific sub-category that meets certain agreed upon standards. These proposed standards include:
■ Any product using the ETF label should be appropriate for a long-term retail investor and should be regulated as a publicly offered investment fund.
■ Funds that use daily leverage and inverse strategies should not use the ETF label. Funds that achieve exposure via a swap (rather than physical replication of the index) should use certain best practices.
For swap-based ETFs, iShares recommends that the risk of counterparty exposure can be mitigated by adopting policies for using high-quality counterparties unaffiliated with the ETF's sponsor and setting standards for collateralised exposure.
Top 10 exchange-traded products in UK
|ETP||AUM* ranked by US$m|
|iShares S&P 500||10,201.30|
|ETFS Physical Gold||7,308.10|
|iShares MSCI Emerging Markets||6,214.10|
|GBS Bullion Securities||6,162.00|
|iShares FTSE 100||5,526.00|
|iShares MSCI World||3,849.70|
|Physical Gold Source P-ETC||2,399.90|
|iShares MSCI North America||2,151.70|
|iShares MSCI Japan||2,084.60|
|iShares MSCI AC Far East ex-Japan||2,062.20|
Source: BlackRock Investment Institute, Bloomberg, as at 20 March 2012. *AUM = Assets under management
The first ETF was launched in 1989 with the number of funds steadily growing to more than 2,000 products globally today. Although ETFs come in many shapes and sizes, they share a common feature: they combine key traits of traditional mutual funds and individual stocks.
Like mutual funds, ETFs provide exposure to diversified baskets of securities typically tracking a specific equity, fixed-income or commodity benchmark. Conventional ETFs do this by holding the securities directly, while newer "synthetic" ETFs do this by holding derivatives such as swaps that reflect the returns of underlying securities. Both types of ETFs can be bought and sold throughout the day on a stock exchange.