European ETF issuers must follow US lead in calling for clarity on ETP classifications

Tom Eckett

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European ETF issuers should take note of the recent calls by US asset managers for more clarity around the classification of exchange-traded products (ETPs).

Last week, some of the largest US ETF issuers including BlackRock, State Street Global Advisors and Invesco implored exchanges such as Nasdaq to provide a solution that enables investors to clearly differentiate between the various ETPs.

This has been a major concern for the ETF industry as a blow-up in a more esoteric part of the ETP market could lead to reputational damage for the whole ecosystem.

One asset class which has struggled recently, for example, is the oil market as huge swings in prices forced many leveraged ETPs to close while other ETP providers made the decision to change their investment strategies in order to avoid returns being wiped out entirely.

The coalition of ETF issuers called for the ETP landscape to be split into four categories; ETFs, exchange-traded commodities (ETCs), exchange-traded notes (ETNs) and exchange-traded instruments (ETIs).

Work has already started this side of the pond and has been a major focus for the European Fund and Asset Management Association (EFAMA), which is looking to differentiate between UCITS ETFs and other ETPs.

As Federico Cupelli, senior regulator adviser at EFAMA, said: “ETFs should not be confused with other ETPs such as ETNs and ETCs.

“ETFs are UCITS funds in Europe and are embedded is a regulatory structure that is by far more robust in comparison to other types of ETP.”

While the lead has been taken in the US, it is important ETF issuers start making the same calls to the various exchanges across Europe.

Despite being an important first step, however, it is unclear how labelling inverse and leveraged products as ETIs will work this side of the pond.

In Europe, many leveraged products such as the L&G FTSE 100 Leveraged Daily 2x UCITS ETF (LUK2) are fully compliant with UCITS regulation which is seen as the global standard so further separating the landscape could lead to more confusion.

However, one could certainly argue the move to categorise the ETP landscape should partially be done in order to split leveraged products from the rest of the market.

As highlighted in a previous note, retail investors still do not fully understand the dangers involved when becoming exposed to inverse and leverage products so differentiating them from plain vanilla funds is an important first step.

When proposals are published for the European ETP market, it will be a far tougher task to split the ecosystem when leveraged products are regulated under the UCITS umbrella which could mean the classification has no impact at all for investors.

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