Welcome to the adult table, says SEC to ETFs

Reuters

Exchange traded funds are growing – and regulators are taking note of them.

On Thursday, the Securities and Exchange Commission issued a much-awaited decision giving ETFs their own set of regulations, a step that will swell the ranks of funds available to investors by facilitating the launch of funds by issuers.

"This is a maturing industry," said J. Garrett Stevens, CEO of Exchange Traded Concepts, a company offering services such as marketing, compliance and portfolio management to fund issuers. "ETFs have been around long enough for regulators to realize that they need their own rules."

Since the first ETF

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27 years ago, all ETFs had to fall under the rules established in 1940 for mutual funds, even though it was a very different type of product. "Exchange-traded market" means that ETFs adopt the basic principles that define mutual funds – pooled assets – and make them more accessible. ETFs can be bought and sold and their prices updated to reflect this activity all day, just like stock.

At present, more than $ 3.3 trillion of assets are held in approximately 2,000 ETFs.

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For years, the SEC has offered ETFs a by-pass called "waiver", but by asking for such an exemption – in fact explaining to the agency why all the rules for mutual funds should not be enforced. Apply to a new ETF – often added as much as needed. six months and tens of thousands of dollars in the launch process.

Some of the most exotic ETFs will still need an exemption: fund of funds

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, leveraged funds

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or those who take a reverse approach to investing.

Analysts believe, however, that the vast majority of funds launched in recent years would not have been, which means they will move into the market faster. Stevens said a new fund working with his company could hope to trade in 90 to 100 days under the new regime.

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The rule also eases the day-to-day management of portfolios for actively managed funds, which currently have tax implications when transferring their holdings. This could make it more attractive to launch an actively managed fund rather than one that passively follows an index.

"By treating ETFs as a different investment product from mutual funds, the SEC has taken steps to enhance investor education in ETFs and facilitate management and product launch by asset managers." said Todd Rosenbluth, Head of Fund Research and Mutual Funds at CFRA. , in a note to customers after the publication of the rule.

"We believe that small asset managers will expand their product line and that new entrants will seek to join the ETF sector, especially with thematic offerings."

Is it necessarily better? Stevens says yes. There are far fewer ETFs than mutual funds, he said. "It's great for consumer choice, and that's no different from innovations in any industry. If a new fund is started and not receiving attention, it will disappear. "

It's not always that simple when an ETF closes, though. There are tax implications for the investor, not to mention the hassle of reinvesting. A CFRA analysis of 1,662 funds over the five-year period 2014-2019 revealed that 24% of them were closed and that a few dozen of them had completely changed their original investment intention.

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