Why An ETF Association Makes Sense

Jan 24th, 2012

The global exchange traded fund industry has in some ways become a casualty of its own success. A strong entrepreneurial spirit combined with product innovation has helped the industry reach a critical mass where it is rapidly gathering assets. The speed of the ETF's industry growth has left it somewhat unequipped to deal with a torrent of primarily misguided criticism about ETFs as their use has become more prevalent.

In May of 2011, three Canadian ETF providers recently came together to launch the first national ETF industry association in the world, the Canadian ETF Association (CETFA). Our mandate is pretty simple, we're going to work to educate institutional and retail investors as well as the advisor community on the benefits and uses of ETFs, provide industry statistics and commentary on ETF related issues to the Canadian financial media and advance industry issues with regulators, government agencies and interested third parties.

This mandate can be divided into two goals; the first goal is to create more awareness about exchange traded funds and to provide greater depth of education to investors about their usage.

The second goal would be to deal with industry specific issues, whether they are regulatory or structural, that affect all member firms. CETFA can take an activist role on behalf of all ETF providers to improve industry practices and defend the positions of member firms.

Many ETF topics are second nature for those of us championing their merits for the last decade, but the fact of the matter is the ETF industry is still very much in its infancy when you compare the size of the ETF industry and its broader influence to other spheres of investment management, such as the mutual fund industry, which is more than 10 times the size of the ETF industry in Canada and has much greater resources at its disposal to influence investment discourse.

It can be a daunting task for one ETF provider on its own to champion the merits of ETFs to Canadian investors. An association is able to pool resources so that it has real strength and more importantly legitimacy when it addresses issues that impact the broader ETF industry.

While certain facts of how ETFs work are second nature to those of us in the industry, it is very much new to the majority of investors and members of the financial media across the globe.

In our view, the biggest challenge to the growth of ETF usage is a lack of education about how they work and how to best appropriately use them. Many individual investors and advisors are only beginning to view ETFs as part of their investment toolkit, while more investors are embracing ETFs, the structure itself is starting to be used for a much broader range of investment strategies than the initial equity index tracking strategies ETFs are most commonly associated with.

The vast majority of the innovation happening on the product side of ETFs is beneficial for investors since it is effectively a democratization of the investment space where strategies previously only available to institutional investors are now available to individual investors.

We're asking many investors who are only now discovering ETFs to not only get their heads around what an ETF is and how it works, but to also understand the nuances of product evolution, including the development of "synthetic" ETFs and actively managed strategies. It is therefore necessary for an arm's length association to step in and educate investors and regulators about ETFs on a wide variety of topics. This is the primary mandate of what the Canadian ETF Association is attempting to do.

We're glad we started this association when we did, because the last few months have been challenging for the global ETF industry. Criticisms about ETF structure in both Europe and the United States, whether warranted or not, has had a cascading effect where ETFs are under scrutiny in every country they are listed.

This makes sense, because while financial regulation is regional, most of the ETF providers in the world are international as is the usage of their ETFs. An article in the Wall Street Journal about U.S. ETF problems will attract the interest of regulators in Australia and Europe, much the same way that last years report on ETFs by the FSB, which was specifically looking at Euro-centric issues, has sparked regulatory inquiries in Asia and North America.

In the absence of any independent "authority" on ETFs - a role an association can fulfill - explaining what is happening in the ETF industry has been largely left to third-party commentators, who may or may not have a self-serving agenda, and pits individual ETF providers against each other. Instead of working together, ETF providers sometimes end up working against each other, which can undermine our common goal of improving and increasing ETF usage.

In Canada, we have regulations that are different than Europe and other jurisdictions and we needed an organization to explain the difference to regulators and the media. We are working actively to build consensus as an industry and work with regulators on best practices for the industry. A European association would likely be able to do the same, and would be valuable in defending the merits of its own system and combating myths and misinformation about ETFs that are hindering the growth of ETF usage.

Obviously the ETF industry is a competitive one and not all ETF providers are going to be on the same page with every issue, but you'll find when you sit down with your industry peers that on most issues there is consensus. Building this consensus helps us all in achieving our goal of building a better ETF industry that serves the best interests of all investors.

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