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New ETF Guidelines Shake Up the Industry

The July round-up of ETF news includes information on new rules and new listings

Lee Davidson 1 August, 2012 | 3:52PM

New ETF Guidelines Shake Up the Industry
On July 25, The European Securities and Markets Authority (ESMA) released its latest consultation paper outlining new guidelines for exchange-traded funds (ETFs) and other UCITS. The new policies are meant to bring more transparency to the industry and ultimately benefit investors.

The ESMA will now require fund managers to return all revenue, net of costs, generated via securities lending back to fund shareholders. Fund providers will also have to disclose, in a fund’s prospectus, any direct or indirect fees and costs from securities lending, and the identity of the parties to which such fees and expenses are paid.

Morningstar's Director of European ETF Research, Ben Johnson, has called this a big win for investors and highlighted that this is something Morningstar initially called for last year.

From a transparency standpoint, the new policies are great for investors, who have thus far been mostly in the dark about exactly how securities lending proceeds get split up. However, as Morningstar ETF analyst Al Kellett points out, the guidelines do not necessarily ensure that the end investor will get any more of the revenue, or that securities lending will be any less profitable for the fund providers or their lending agents.

According to Kellett, "Mandating the return of 100% of revenues from securities lending sounds great, but when it’s 100% net of direct and indirect fees and expenses, and providers can allocate those fees and expenses as they see fit, the stipulation loses some of its teeth."

Additionally, ESMA's consultation paper laid out requirements for greater transparency around the calculation and composition of the indices tracked by ETFs and other UCITS as well as putting forth a clear definition and labeling guideline for UCITS ETFs.

ETF Securities No Longer Up for Sale
On July 30th, Ignites Europe reported that ETF Securities, the exchange-traded product (ETP) provider, is no longer up for sale.  In early December 2011, the founder and majority owner of ETF Securities, Graham Tuckwell, announced his intention to sell ETF Securities, which is well-known for its slate of precious metals ETPs. Morningstar Director of ETF Research, Ben Johnson, was quoted at the time saying that "the firm’s future prospects would appear to be inextricably linked to the future development of precious-metal prices, given the concentrated exposure of the firm’s product portfolio to this particular sector.”

UBS Continues ETF Listing Spree
On July 16th, UBS launched 45 ETFs on the SIX Swiss exchange in Zurich. The ETFs cover a wide variety of fixed income and equity indices. UBS launched 18 fixed income ETFs tracking US, German and liquid corporate bonds across a range of maturities. In addition, UBS launched 27 equity ETFs tracking various indices focused on small-caps, regional infrastructure, and socially responsible investing, among others. This launch comes on the heels of the UBS' record-setting day on the London Stock Exchange (LSE) last month. In June, UBS launched 66 exchange-traded funds on the LSE, setting the record for number of new launches in a single day.

db X-trackers Brings China A-share Access to Europe
On July 18th, db X-trackers listed the db x-trackers CSI300 Index ETF (XCHA) on the London Stock Exchange. The ETF tracks the CSI300 index which consists of the 300 A shares with the largest market capitalisation and liquidity from the entire universe of listed A share companies in the People’s Republic of China. Historically, international investors have struggled to gain access to Chinese A shares because of restrictions on foreign investment.

“The China Securities Regulatory Commission is expanding its quotas for foreign investment, signaling a willingness by the Chinese government to open up China's capital markets further to international investors. But for many investors it remains a difficult market to access. The db x-trackers CSI300 Index ETF can bridge that gap,” said Manooj Mistry, head of db X-trackers for the UK.

Coming Up: Morningstar ETF Invest Conference Europe 2012
Thought Leadership from the Leaders in the ETF Space

Morningstar’s Inaugural ETF Invest Conference Europe will feature some of the sharpest minds in ETF management and top pundits to help sort out the complexities, alternative theories, and investing strategies using ETFs. The event features keynote presentations, and general discussions, on key areas of strategic and tactical investing solutions. The conference will also give you the opportunity to develop and expand your professional network by conversing with fund managers, analysts, providers, and other financial industry experts.

For full details visit the conference web site here.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Lee Davidson

Lee Davidson  is an ETF analyst with Morningstar Europe.