Many are wondering why ASIC banned opaque ETFs in the first place if they had no ambition to change anything. And many are wondering why ASIC bothered releasing new guidelines that do nothing to fix the root cause of a problem.
Some felt that an opportunity to provide reform and leadership had been squandered.
ASIC allowed ETFs that hide their portfolios to list on exchange this week, following a five month ban.
It released a new set of guidelines to accompany the ending of its ban which, ASIC believes, will help fix problems that come with trading ETFs whose fair values are unknowable to outsiders.
But according to industry sources, ASIC’s new guidelines contain no hard rule changes. Some aspects of the new guidelines – such as requiring that supervision arrangements are adequate – have been dismissed as “vacuous”. Other aspects – such as requiring market makers to have no knowledge of an opaque ETFs portfolio – have been dismissed as inconsistent. Market makers cannot guarantee fair prices without knowing what is inside an ETF, sources say.
They also stressed that there will now be no competitive pressures that help to tighten spreads on opaque ETFs, in the way that there are for ETFs that publish their holdings every day. Opaque ETFs trade on wider spreads than their transparent counterparts, ASX data indicates.
For Arian Neiron, managing director of VanEck Asia Pacific, there was a danger that new investors would not understand how different kinds of ETF worked.
"The water is getting muddied in terms of investors' and advisors' perceptions. We’ve had clients come to us that are confused about whether ETFs are transparent or not and what the definition of an ETF is. Under ASICs rules these [opaque active ETFs] can be marketed as active ETFs, and ultimately as ETFs."
He added that he welcomed the competition from active fund managers and stressed that they would still have to compete with smart beta approaches.
Christian Obrist, the head of iShares Australia, welcomed ASIC's investigation, but wanted to wait for more information to come through.
"We look forward to more detailed information on their findings and recommendations in early 2020 so that the suggested improvements can be further understood and implemented by product issuers. Addressing the identified risks with the internal market making model... will improve the ETF ecosystem in Australia and help protect investors."