The Australian financial regulator has issued a raft of recommendations for issuers in its first review of the burgeoning exchange-traded product (ETP) market across the ditch.
According to the Australian Securities and Investments Commission (ASIC) report, while the ETP market (of which the exchange-traded funds, or ETF, sector is the major subset) was mostly working well there were “potential risks that require monitoring by issuers and oversight by market operators”.
Principally, ASIC found there was a risk that erratic bid/offer spreads – especially for smaller, illiquid products – could leave retail ETP investors paying higher costs than the advertised cheap rack rate suggested.
Over the year to the end of December 2017 the Australian ETP market grew from about A$25.6 billion to almost A$35.7 billion across 18 issuers while product numbers jumped from 151 to 175 including: 142 ETFs; 28 managed funds; and, five ‘structured products’. ASX-listed ETF prices ranged from 7 to 74 basis points, ASIC says, as managed fund ETPs costed between 49 to 205 basis points.
Self-managed superannuation funds (SMSFs) represent 60 per cent of the Australian ETP market, ASIC says, with both other retail and institutional ownership set to rise. Many NZ investors also invest in ASX-listed ETPs while the home-grown market is expanding too – albeit at a slower rate than across the Tasman.
The NZX-owned Smartshares, which currently has a monopoly on NZ-listed ETFs, has about $2.5 billion under management. However, NZX fund management subsidiary represents about 70 per cent ($1.7 billion) of the total Smartshares pool: even so, external retail investors slightly outpaced in-house fund growth over the last year (39.3 per cent and 32.5 per cent, respectively).
It is understood a couple of Australian-based ETF providers are also eyeing up the NZ market with BlackRock reportedly working on a Kiwi dollar-hedged version of its NZ equities iShares fund and Betashares looking to hire a local business development manager.
As well as potential product mis-pricing, the ASIC study also highlights concentration risk among the current shallow pool of Australian ETP ‘market makers’ with just two players providing most of the underlying liquidity.
Among the list of about 10 recommendations, ASIC says ETP providers should publish more regular net asset valuation updates to investors – or iNAVs – and carefully monitor product liquidity. Furthermore, ASIC says ETPs should disclose ‘tracking difference’ – which compares product return versus benchmark – ahead of the more technical measure of index deviation, ‘tracking error’.
In a statement, ASIC commissioner, John Price, said: “We encourage issuers to continue to educate investors and their advisers about how the ETP market operates and to provide them the tools, like an iNAV, to help them make informed investment decisions.”
The regulator also encourages ETP issuers to exercise corporate governance duties (including voting shares) and ensure their advertising and marketing materials were not deceptive.
While most ETP marketing guff was above board, ASIC says it has pinged a couple of providers in relation to misleading advertising including a fixed income product incorrectly labeled as ‘all investment grade’ and another inappropriate comparison with term deposit returns.
“We are currently considering further action in relation to some misleading material we have identified about ETPs,” the ASIC report says.
The regulator says issuers should also consider closing smaller ETPs if they become “uneconomic” to operate.