ETPs: survival of the fittest

The rapid rise and evolution of the global ETP industry has suddenly caught the attention of international regulators. In April, the Financial Stability Board, the International Monetary Fund and Bank for International Settlements all released reports warning of developments in the ETP market that could cause systemic risk, while making the industry more complex and opaque.

As outlined in ETFM's news section and in our Industry reaction piece, the regulators highlight potential risks stemming from both physically-backed and swap-based products.

One over-arching issue that emerges from this, but is not elucidated as clearly as it could be in the reports, is the conflation of other exchange-traded products with ETFs. This is largely contributing to fears over opacity and complexity, as each type of product has a different risk and reward profile. Once a global, industry-wide set of parameters has been established for the different ETPs, then the risks relating to each product type can be more clearly outlined.

It is interesting that a lot of the points highlighted by the regulators are not unique to the ETF industry, but relate to the whole fund market. Yet, this sort of regulatory scrutiny regarding these issues is not being applied in the longer established and far larger actively-managed product space – and even the wider index-tracker space – where the number of funds and assets under management dwarf that of the ETF arena.

Any industry that grows so rapidly and innovates like the ETP market is certain to come under question and require clarification. This regulatory spotlight should be used as an opportunity to address confusion and enhance product transparency, rather than to scaremonger or denigrate different types of products.

That regulators are suddenly taking notice of ETPs shows they have cemented their position on the global investment stage. It is now a matter of ensuring ETPs retain the tenets that have fuelled their popularity; namely transparency, cost-efficiency and simplicity. Those products that do not retain these facets may be left by the wayside. Essentially, this could mean product evolution turns into survival of the fittest.

Emma Dunkley, Editor