INVESTMENT STRATEGIES
ETF EDUCATION
Adviser Centre
Forms & documents
As the Exchange Traded Products (ETPs) market in Australia has grown over the last ten years, so has the number and variety of products, with very different risk profiles.
In Australia, information sheet (INFO 230) provides guidance for licensed exchanges that admit ETPs1 and outlines the distinction between ETF (exchange traded fund) and ETMF (exchange traded managed fund), as well as some additional considerations for ETPs, that have unique or novel features (such as synthetic or active ETFs). As the industry has adapted to the growth of ETPs in Australia, this guidance has been updated but not retrospectively applied, and while understood by exchanges and product issuers, most investors and media continue to adopt “ETF” as a blanket term for any product that offers exchange tradability. Many products that can be grouped under the term “ETF” have very distinct risk profiles and/or features. For example, some use futures to deliver leveraged or inverse performance to an index, and other vehicles are exposed to the creditworthiness of the issuer of the product, which is like a debt instrument. As such, we believe that requirements should exist that constrain the application of the term “ETF” to a specific subset of ETPs (see below categories ) and that other types of ETPs should be put in different categories more suited to their features and objective.
A clear and consistent categorization of the different types of ETPs will help investors and the professionals who engage with them (including advisors and broker-dealers) complete a more thorough due diligence process when investing in these products.
A real-life example of the importance of clarity
Recent market events have demonstrated the need for clearer distinctions between different types of ETPs. In April 2020, a dramatic decline in oil prices resulted in a 3x levered crude oil-linked ETP in the US being delisted with an expected value of zero dollars per share.2 While the decline in value was extreme, this product actually performed as designed. Similar examples exist in Australia with large value changes during the volatility in March/April in single commodity products such as oil ETPs and levered/inverse exposures.
A recommended ETP classification system
While guidance for licensed exchanges1 in Australia has provided some ETP naming conventions for investors, the differences in risk return profiles between ETPs may be improved with a clear and simple classification that is adopted within the ETP name (for both existing and new products) and all product materials as well as communication in media.
In the US, while regulators have worked to promote transparency around these products, including disclosure requirements they have not yet adopted a classification system that categorizes ETPs formally based on certain key features and risk profiles.3
To help advance clearer classifications, on May 13, 2020, an industry coalition of leading ETP sponsors, including BlackRock, Charles Schwab Investment Management, Fidelity Investments, Invesco, State Street Global Advisors and Vanguard, submitted a letter to each U.S. stock exchange with ETP listings—NYSE, Nasdaq, and Cboe—to enlist their support implementing more consistent identifications and categorizations of ETPs.
Recommended Categories of Exchange-Traded Products
Many players in the ETP ecosystem, from issuers to exchanges, are well-positioned to help advance ETP classifications. Incorporating consistent ETP nomenclature at the exchange data feed level would not only benefit investors by providing more clarity into specific product characteristics, but also assist brokerage platforms in implementing point-of-sale guardrails to better protect investors, as well as helping innovation in a way which doesn’t create confusion.
While each jurisdiction needs to take into account the local market considerations, we believe that adopting a simple and comprehensive ETP classification is relevant for jurisdictions, beyond the US, including Australia.
1 Source ASIC information sheet 230 is for licensed Australian exchanges that admit exchange traded products (ETPs): https://asic.gov.au/regulatory-resources/
2 See Barclays Press Release (April 20, 2020), Barclays announces the redemption of the iPath® Series B S&P GSCI® Crude Oil Total Return Index ETNs (“the ETNs”) and the suspension of further sales and issuance of the ETNs.
3 Most recently, the SEC chose not to include an ETP naming convention in Rule 6C-11 (the “ETF Rule”); however, the Commission encouraged ETP market participants to “continue engaging with their investors, with each other and with the Commission on these issues.”
IMPORTANT INFORMATION
Issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL) for the exclusive use of the recipient, which warrants by receipt of this material that it is a wholesale client as defined under the Australian Corporations Act 2001 (Cth).
This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. Refer to BIMAL’s Financial Services Guide on its website for more information. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction.
Information provided is for illustrative and informational purposes and is subject to change. It has not been approved by any regulator.
This material is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. BIMAL is a part of the global BlackRock Group which comprises of financial product issuers and investment managers around the world. BIMAL is the issuer of financial products and acts as an investment manager in Australia.
BIMAL is the responsible entity and issuer of units in the Australian domiciled managed investment schemes referred to in this material, including the Australian domiciled iShares ETFs. Any potential investor should consider the latest product disclosure statement (PDS) before deciding whether to acquire, or continue to hold, an investment in any BlackRock fund. BlackRock has also issued a target market determination (TMD) that describes the class of consumers that comprises the target market for each BlackRock fund and matters relevant to their distribution and review. The PDS and the TMD can be obtained by contacting the BIMAL Client Services Centre on 1300 366 100. In some instances the PDS and the TMD are also available on the BIMAL website at www.blackrock.com/au. An iShares ETF is not sponsored, endorsed, issued, sold or promoted by the provider of the index which a particular iShares ETF seeks to track. No index provider makes any representation regarding the advisability of investing in the iShares ETFs. Further information on the index providers can be found in the BIMAL website terms and conditions at www.blackrock.com/au.
BIMAL, its officers, employees and agents believe that the information in this material and the sources on which it is based (which may be sourced from third parties) are correct as at the date of publication. While every care has been taken in the preparation of this material, no warranty of accuracy or reliability is given and no responsibility for the information is accepted by BIMAL, its officers, employees or agents. Except where contrary to law, BIMAL excludes all liability for this information.
Any investment is subject to investment risk, including delays on the payment of withdrawal proceeds and the loss of income or the principal invested. While any forecasts, estimates and opinions in this material are made on a reasonable basis, actual future results and operations may differ materially from the forecasts, estimates and opinions set out in this material. No guarantee as to the repayment of capital or the performance of any product or rate of return referred to in this material is made by BIMAL or any entity in the BlackRock group of companies.
This material contains links to third party websites. BlackRock does not control and is not responsible for the information contained within these websites. None of these links imply BlackRock's support, endorsement or recommendation of any other company, product or service.
No part of this material may be reproduced or distributed in any manner without the prior written permission of BIMAL.
©2024 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES and the stylised i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
MKTGH0423A/S-2837492