ETF TV News #73 Miranda Seath of The IA and Howie Li of LGIM discuss the inclusion of ETFs in the IA sectors

Dan Barnes: Welcome to ETF TV News – your update on newly issued exchange traded funds and products. I’m Dan Barnes, and joining me today is Deborah Fuhr of ETFGI, Miranda Seath, Head of Market Insight at the Investment Association and Howie Li, Head of ETFs at Legal & General Investment Management (LGIM). Guys, welcome to the show.

Deborah Fuhr: Great to be here.

Miranda Seath: Lovely to be here.

Howie Li: Great to be here, thanks, Dan.

Deborah Fuhr: So today we’re going to be discussing the fact that on April 19th, the Investment Association decided to include ETFs for the first time in their sectors.

Dan Barnes: Miranda, to start with you, what caused the IA to start including ETFs and why weren’t they before?

Miranda Seath: So it’s been quite a long process. We actually went out to consultation on this issue in 2018, so it’s something that’s been on our radar for a while. And clearly what we’re trying to do with the IA sectors is to reflect the choices that are available to retail investors in the UK. And as we’ve seen ETFs gain traction, obviously, we’ve also seen a trend to passive in the UK, following the RDR, (The Retail Distribution Review) the IA sectors have been keeping an eye on ETFs, looking at the whole of the sectors framework and thinking about how ETFs can best fit in, knowing that we’ll see an increase in funds. So, on April the 19th 2021, we welcomed 530 ETFs into our sectors, so we’re really pleased to be able to reflect the fact that ETFs are increasingly a part of the retail investor toolkit.

Deborah Fuhr: And can you tell us which ETFs you decided to include or how did you decide which ones would be in the sectors?

Miranda Seath: So we don’t actually decide. It’s very much the firms themselves that put forward ETFs to be included. And the IA has an ETF committee, which is made up of a number of firms, all of which I’m happy to say did actually submit ETFs for inclusion, so some of the big names in the industry and also, happily, Legal & General Investment Management ETFs are in there as well. Really, it’s a process where we ask firms to categorise their own ETFs. And obviously we have a number of sectors, we’ve got about 52 IA sectors, in fact, and some of the largest sectors taking ETFs for our global sector, and as you may have seen in the news, global bonds. But because we were seeing a big increase in the number of ETFs coming in, we’re also aware that that could really cause the sectors to become potentially too large for retail investors to be able to find and compare funds. So as part of the process, we’ve actually split up our global bonds sector into 14 new sectors. There’s no barrier to entry, really, the only criteria that we do have is that at the moment we’re anticipating physical ETFs, but other than that, it’s really up to ETF providers to submit the funds and to decide on the sectors that are most appropriate.

Deborah Fuhr: And do they have to be listed on the London Stock Exchange to be included or could they be listed on exchanges across Europe?

Miranda Seath: Really, the main stipulation is availability for sale in the UK and it has to be a UCITS fund with HMRC reporting status. And obviously we’ve been working with firms to welcome ETF providers into this process. Some firms do have quite substantial knowledge of how the IA sectors work, and other firms are new to our sectors framework, so we have a team to answer questions and take people through the application process. But it’s very similar, in fact, identical to the one that we use for overseas domiciled funds.

Deborah Fuhr: And Howie, how important is this to you as an ETF issuer?

Howie Li: This has been hugely important that we’ve been engaged in this process right from the very start. I mean, if you take a look at how investors think about investments these days, people are looking at passive instruments, index based, or they’re looking at active instruments. And having ETFs being part of the framework basically means you get an all-of-market view on this and being able to benchmark whether you’re index based or you’re active based, it’s really important for investors to be able to see the entire universe available to them here in the UK. I think it also promotes the fact that ETFs are just another mutual fund vehicle; it just happens to be listed.

Deborah Fuhr: What type of investors are using the IA database to do their fund selection?

Howie Li: It’s most definitely the wealth market as well as the advisory market, because they refer to those sectors. And if you think about how even in the funds world, many trump up their peers, and the peer groups tend to be within those same sectors, so it is very much that group that’s going to look at, ‘well, what else is in your peer group, whether it’s index based or discretionary based.’

Deborah Fuhr: And when you think about the UK market, can you talk to us about what type of investors are overall using ETFs?

Howie Li: The market itself is still pretty fragmented when you look at just the retail end. There are certainly investors, direct retail that will go onto a platform and buy an ETF themselves because it’s very simple to buy, just like buying a stock in a single company. But of course, when it comes to, let’s say the advisory market, there are still some challenges for certain advisors to buy into ETFs, not because they don’t want to, but because some of their platforms haven’t made it as easy for them, but there’s been positive momentum to try to solve that for some time. So I think on the advisory side, that is going to continue to improve. And then certainly in the wealth management space, you look at discretionary fund managers or private banks; they’re very comfortable using ETFs. In fact, I would say that they use mutual funds and ETFs interchangeably. What’s crucial there is the investment strategy.

Deborah Fuhr: Overall, what type of ETFs are you finding to be most popular right now in the UK?

Howie Li: We certainly have a thematic focus as a firm, and that’s where a huge amount of interest has come in previous years, and especially in the last, I would say, 12 months or so. But of course, a lot of people are using ETFs as tactical as well as strategic building blocks. So a lot of investors will continue to look for market, cap-based investments, beta investments, but even that’s getting disrupted because of the need to be sustainable.

So if you ask me where investors are most likely going to look, it’s going to be in the thematic space, and a lot of them are in the global sectors, within the IA, and then also in the kind of the regional equities side of things. I think fixed income is one area that the ETF market will continue to expand into and hopefully will also fit within the IA sectors very cleanly.

Dan Barnes: Are there any similar initiatives in other geographical areas being run by trade associations?

Miranda Seath: In Europe, we have the European Fund Classification Task Force, which I’m happy to say that I am also chair of, which is a pan-European initiative for funds to be categorised. There are two levels. One is verified with a similar process to how the IA works; the fund group would actually submit their funds for classification, but we also have an indicative classification where we can just look at the holdings of funds, if a group should wish to put the funds forward, but not actually go through the process of reporting data on a quarterly basis.

Very much, the focus of trade bodies is representing the interests of our members, but we also have a focus on the end investor and the helping-to-make-sense-of-the-market. And the difference being with the IA, obviously, that data vendors like Morningstar, FE, L.P create performance averages for our sectors. One of the ways investors use our sectors is to actually compare the performance of particular funds against their sector industry average. So there is that element in the UK and I think that’s a really important element. But in Europe, it’s really around helping to find consistent fund peer groups across different jurisdictions. And then obviously there are the commercial providers who create sectors as well. So there are different schemes out there, but at the IA we have a monitoring process for our sectors, so we’re actually analyzing the holdings of funds in our sectors to make sure that they are meeting our sector definitions and we do take enforcement action if they don’t, to ensure that investors can have confidence that funds really are meeting the sector criteria.

Deborah Fuhr: That’s terrific! Thank you both for joining us.

Miranda Seath: Thank you.

Howie Li: Thanks very much. Great to be here.

Dan Barnes: So Deborah turning back to you, could you give us an update on which products were issued over the previous week and a bit of color around what was issued, please?

Deborah Fuhr: So last week was actually a really slow week. There were only 10 new ETFs that came to market from nine issuers. There was another Bitcoin ETF in Canada, so there’s really been a flood of crypto products coming to market. One fixed income and eight equities. We saw another dividend product come to market. But I think the most exciting thing is at the end of April, what we saw is the ETF industry has broken through nine trillion dollars. So this has been an amazing year when we look at the growth in assets, when we look at the growth in net new assets going into ETFs. So, it’s been an exciting time, although there haven’t been a lot of new listings.

Dan Barnes: That’s great, Deborah, thank you so much.

Deborah Fuhr: Thank you.

Published on May 11, 2021