ETFs to be included in IA fund sectors from 2020

May 23rd, 2019 | By | Category: ETF and Index News

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The Investment Association (IA), the trade body representing UK fund managers, has given the green light for ETFs to be added to its fund sectors from Q1 2020.

London UK ETFs

The Investment Association is to include qualifying ETFs in its fund classification sectors from Q1 2020.

The IA sectors – there are 37 – provide a way of dividing the more than 3500 funds on sale in the UK into broad groups. Investors and their advisers can then compare funds in one or more sectors before looking in detail at individual funds.

Galina Dimitrova, Director of Investment and Capital Markets at the Investment Association, said, “We want to ensure that the IA sectors reflect the full range of products the asset management industry has to offer savers around the world. ETFs are a growing part of this market and their inclusion in the sectors will enable consumers to compare across a wider variety of products.”

Most sectors are organized around the principal asset types in which the fund should invest and may be further classified by criteria such as geographical region. For example, the UK All Companies sector comprises funds that invest at least 80% of their assets in UK equities. Funds within this sector may vary considerably by investment strategy and risk profile.

Consistent with the current approach, only ETFs that are either UK domiciled, or are UCITS-compliant with HMRC reporting fund status will be included. Additionally, ETFs must track their index through physical replication to be eligible for the sectors.

According to the IA, over 200 ETFs currently meet the requirements for placement within the IA sectors. ETF providers need to submit an application by 14 August for their fund to be included in the initial batch of ETFs in Q1 2020, after which further ETFs will be added on a rolling basis.

Industry view

Christine Cantrell, ETF Sales Director, BMO Global Asset Management welcomed the decision. She said, “ETFs are well established in the industry and the majority of investors are now considering them in their portfolios; however, we believe that they should be equally considered against open-ended funds by all users of IA data, from wealth managers to research firms and the end client. The inclusion of ETFs in the IA’s sectors is a tick in the box to ensure this happens.

“It is evident that some rules-based methodologies followed by ETFs can consistently deliver the required outcomes for investors and now the data will be more accessible to compare ETFs to active funds with similar objectives, providing greater transparency. This is particularly relevant for investors looking for solutions to meet objectives such as income or a quality bias, but who have typically only looked at active managers to achieve those.

“Similarly, where ETFs and index tracker funds have the same benchmarks, it will be easier to compare them based on cost, tracking, and consistency. From a cost comparison perspective, investors will also be able to discern which fund managers can avoid the fee drag on their long-term performance compared to ETFs which aim to minimize costs.”

Hector McNeil, co-founder of HANetf, said, “Adding ETFs to broader investment sectors is an encouraging move from the IA that recognizes how ETFs are becoming the product of choice for institutional and retail investors. ETFs are already winning significant market share from mutual funds – they are at a record AUM of $840 billion in Europe and closing in on $1 trillion rapidly – but there is huge scope for further growth across UK and Europe.

“We have long argued that ETFs are simply a ‘better technology’ to deliver investment ideas and will benefit when fairly judged side-by-side with traditional fund products. ETFs are typically cheaper to own, have intra-day liquidity, trading flexibility, and daily transparency.  By making it easier to compare ETFs to traditional funds, investors will be better able to understand their options and judge the best value product for a given exposure.”

Joe Parkin, Head of iShares UK sales, at BlackRock, said, “ETFs have become a core part of portfolio construction and a ‘must-have’ tool for investors. We welcome the Investment Association’s decision to include ETFs within its sector classifications, acknowledging the increasingly important role that ETFs now play within the UK investment industry.”

Emma Wall, head of investment analysis, Hargreaves Lansdown, said, “The inclusion of ETFs in the IA fund sectors is reflective of how the majority of investors choose a portfolio. Most people do not think about the structure of an investment first – do I want a fund, investment trust or ETF? – but instead build a portfolio by asset class or geographical exposure. For example, an investor who wishes to increase their portfolio weighting to emerging market equities will now be able to compare an emerging market equity ETF with a similar actively managed fund or tracker.

“However, it is important to remember that not all funds are created equally – even those within the same IA sector. Some are focused on capital preservation while others look to shoot the lights out but will be more volatile. Comparing what is essentially a benchmark to an actively managed fund is not always useful – especially over shorter time periods.

“Investors should consider their own risk appetite, their personal financial goals and long-term total returns when assessing any investment – whatever the investment vehicle.”

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