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IA considers putting ETFs into active fund sectors

IA considers putting ETFs into active fund sectors

The Investment Association (IA) has launched a consultation with the intention of including Exchange Traded Funds (ETFs) in its fund sectors, meaning advisers could more easily compare the after-fees performance of passive products with the active funds that aim to do the same job.

The consultation runs until February 2019, and the intention is to allow 200 ETFs to apply to enter the sectors, with only UK domiciled or EU UCITs with HMRC reporting status eligible to be included initially, though FTAdviser understands other products may become eligible in future.

There are 37 IA fund sectors. ETFs are funds that are listed on a stock exchange but enable investors to track the performance of a particular market.

Adam Laird, who is a member of the IA’s committee on ETFs and is also head of ETF Strategy for Europe at Lyxor, said: "ETFs are widely used by private investors, advisers and platforms, including them in IA sectors would allow investors to understand if the ETF is doing what it is supposed to be doing, and to look at the performance relative to active funds.

"In some markets, such as the US, this is particularly important as lots of active funds perform poorly there when compared with an ETF."

Galina Dimitrova, director of investment and capital markets at the IA said: "We are continually monitoring the fund market to ensure that the IA sectors reflect the wide range of products the asset management industry has to offer savers.

"The primary purpose of the IA sectors is to serve the needs of consumers and their advisers and the addition of ETFs must be done in their best interests."

The consultation will close on 1 February 2019 and respondents are invited to comment on the potential benefits and drawbacks of including ETFs in the IA sectors, as well as the best means for their inclusion.

Hector McNeil, co-CEO of HAN ETF, said: "We think this consultation from the IA shows a great deal of foresight and we welcome the move. The fact is most investors have a variety of both active and passive strategies in their portfolios, including ETFs, and by including them in comparison tables it will enable investors to gain a better understanding of how their portfolios are performing.

"Improving transparency in this way can surely only be a good thing for end investors, and we hope the scope of ETFs included can also be widened over time.

"The next generation of ETFs, such as thematic, smart beta and eventually active products, will sit very well in this initiative. These new ETFs will be much more focused on after fee performance rather than just being judged on how low the fees are, so to have them alongside active funds makes a lot of sense."

david.thorpe@ft.com