Green light for ETFs to be included in fund sectors

Up to 200 ETFs will be included in the IA's 37 fund sectors. 

Funds and Investment Trusts May 23, 2019 by Tom Bailey

The Investment Association (IA) has today given the go ahead for exchange traded funds (ETFs) to be included in its 37 different sectors, concluding a consultation launched late last year.

The move, which comes into effect in the first quarter of 2020, will allow investors to be able to compare ETFs against the 3,500 funds already in the IA’s fund sectors. ETFs will be placed within existing sectors, based on factors such as asset class, investment strategy and geographical region.

  • How to invest: ETFs

The move has been welcomed Christine Cantrell, ETF sales director at BMO Global Asset Management. She says: “The data will be more accessible to compare ETFs to active funds with similar objectives, providing greater transparency.”

Hortense Bioy, director of passive strategies and sustainability research at Morningstar, adds:  “The IA decision to include ETFs in its sectors makes perfect sense. ETFs are just vehicles and investors are increasingly becoming vehicle-agnostic; looking to select best-of-breed approaches to portfolio construction irrespective of whether they are a fund or an ETF. Investors are simply looking to select the type of vehicle that best meets their needs.”

In particular, it should become eaiser to identify the potential drag of active management fees on performance, when compared to ETF products in the same sector. Cantrell adds: “From a cost comparison perspective, investors will also be able to discern which fund managers can avoid the fee drag on their long-term performance compared to ETFs which aim to minimise costs.”

Not all ETFs will be eligible for inclusion. According to the IA only around 200 will be included to begin with, all of which will have to apply for inclusion. ETFs with a synthetic replication strategy will not be eligible.

The relatively narrow number of ETFs available for inclusion should assuage some of the concerns initially raised during the start of the consultation. At the time, Darius McDermott, managing director of Chelsea Financial Services argued: “If it is a standard ETF, for example one that invests in UK equities, then it would be fine to add to the IA UK All Companies sector.”

However, McDermott expressed concern that the IA might not be able to appropriately classify certain ETFs. While more basic index-tracker ETFs will be easy to place in certain sectors, many more niche ETFs will have no obvious sector classification.

However, with just 200 ETFs eligible to be consider for inclusion, many of the more esoteric and hard to classify products are likely to not be included.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment