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ETFs undermine product comparison: Research

The proliferation of products in the booming exchange-traded funds market is confusing investors and making it impossible to make like-for-like comparisons.

New research from the US shows the exchange-traded product industry operates opaquely on many levels and ultimately undermines investors' ability to compare products and performance.

The research paper, Exchange-traded confusion: How industry practices undermine product comparisons, written by Ryan Clements, found one of the many gripes consumers face in a saturated market is that naming conventions can be misleading.

Many ETFs have the same name - but invest differently and follow different indices. BlackRock's US Aggregate Bond ETF and Charles Schwab's US Aggregate Bond ETF are examples.

ETFs with similar names, tracking similar or related indices often perform very differently based on different holdings and portfolio maturity composition, Clements wrote.

Other areas of confusion include the abundance of custom indices; the lack of standardisation in calculating NAV per share (which is often undisclosed); and hidden costs like advisory and index-licensing fees.

ETFGI estimates there is US$6.1 trillion of assets sitting in ETFs/ETPs globally. Australia has about $65.5 billion of AUM as the end of June 2020, Rainmaker research shows.

Clements is advocating for reforms in the industry, firstly calling on the US Securities Exchange Commission to standardise ETP providers' website formats. The industry should also use uniform calculation methodologies for key variables such as NAVs and intraday indicative value, and a standardised ETF nomenclature or taxonomy system, including standards for sustainable investing.

While there has been significant innovation in the last 10 years, choice has been good for investors and ETFs open up investment possibilities like never before, Alex Vynokur, co-founder and chief executive of BetaShares said.

It's important to note that the ETP industry in Australia is not the same as the US, he said, pointing to several differences in naming conventions, disclosures and structures.

"ETP is the catchall name ... Exchange-traded notes (ETNs) do not exist in Australia as they carry counterparty risk," Vynokur said.

Moreover, most ETFs in Australia are transparent in the fees charged, he added.

"Just as you cannot judge a book its cover, you cannot judge an ETF by its name," said ETF Securities co-head of sales Kanish Chugh.

Chugh said the ETP industry is doing a good job of providing financial literacy to new investors, who might be "scared of acronyms", as well as investors who are more advanced. This involves educating about the differences in: structures; a physical versus a synthetic ETF; full representation versus sampling; and the role of a market and authorised participant.

"We are at a stage now where the industry is raising awareness about ETFs and how they should be used appropriately," Chugh said.

"I think the ETF providers are doing a good job of that and collectively we are trying to do our bit and complement each other well."

Ultimately, the aim is to help investors make the best decision with the full knowledge available to them that is not just based on cost.

"We are not going to launch the exact same fund as our competitors and differentiate it based on fees. There is no point to that," Chugh said.

Read more: Alex VynokurBetaSharesBlackRockCharles SchwabETFGIETF SecuritiesKanish ChughRainmakerRyan Clements
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