Industry commentators have warned the Investment Association’s decision to delay the inclusion of ETFs in its sectors could lead to the perception the association has a bias against passive investments.
The IA said last week’s the decision was due to a greater level of interest from ETF issuers “than expected”.
Initially, the association said it would include around 200 ETFs, however, some 500 products were put forward with the IA predicting this number could rise further. The association said it is continuing to work to accommodate these ETFs in an updated framework.
ETFs had been scheduled to be included in Q1 this year following the IA’s decision in May 2019 to allow ETFs to be compared against the 3,500 mutual funds already in the 37 sectors.
However, the decision to delay has been met with “disappointment” from parts of the fund buyer market.
Ben Seager-Scott, head of multi-asset at Tilney, said the IA needs to be careful to avoid any perception of bias against passive investments.
“It is definitely disappointing that the inclusion of ETFs in the IA sectors has been delayed,” Seager-Scott continued.
However, he stressed it was important the association ensures it gets the development right.
“The IA has quite rightly recognised that ETFs are here to stay, so as long as this delay is genuinely about making sure the change is implemented appropriately, then despite the disappointment, that’s the right thing to do.”
Echoing his views was Hector McNeil, co-CEO and co-founder of HANetf, who said any slowdown in implementation could be interpreted as “vested interests dragging their feet”.
“I am sure that is not the case but would be better for everyone to create this transparency and level playing field,” he added. “The sooner this process is completed the better for the end investor.”
Another issue the IA may have faced is trying to decide which like-for-like ETFs can enter its sectors. For example, choosing between which Euro Stoxx 50 ETF from BlackRock, Amundi, DWS and all the other issuers could have proved a stumbling block.
This was highlighted by James McManus, director of ETFs at Nutmeg, who added the different listings presents a challenge as to which one to include.
“I am surprised by this to be honest,” he said. “The challenge for ETF inclusion in IA sectors is mostly whether an influx of passive products into a particular sector changes the dynamics of how active stock pickers performance has been viewed historically.”
However, Weixu Yan, head of ETF research at Close Brothers Asset Management, said the IA is right to not rush the process of including ETFs in its sectors.
“I would love to see ETFs incorporated within the IA sectors, but it needs to be done thoughtfully,” Yan continued. “The worst-case scenario would be to include ETFs in haste such that they get misrepresented.”