ETF TV News: Defined outcome and other ETF listing news from the first week of 2021

Dan Barnes Welcome to ETF TV News – your update on the latest exchange traded products and funds issued over the previous week. I’m Dan Barnes and joining me here is Deborah Fuhr. Deborah, welcome to the show.

Deborah Fuhr Thank you.

Dan Barnes So can you talk us through the number of ETFs that have been issued over the past seven days and also perhaps just go into detail about what they actually can be used for?

Deborah Fuhr In the first full week of 2021, we saw 13 new ETFs come to market. Nine of them were listed in us, three were in China and one was in Zimbabwe. When we look at them, seven are active, which we do see a real trend towards active. Six of them are tracking different indices. Five are thematics. When we look at the products, it’s probably interesting to talk a little bit about the types of products that have come to market. So when we look at the US, Direxion has launched a cloud computing bull 2X ETF and a cloud computing bear 2X. So when investors are using this, it’s magnifying the upside or downside, but they have to remember that each day it’s rebalancing. So these are intended to be products that you would not be holding for long periods of time, because there’s a compounding effect that you can’t predict beyond one day what the returns would be.

Dan Barnes And has there been any controversy around leveraged ETFs?

Deborah Fuhr Yeah, I think many of the regulators were concerned that retail investors don’t understand how leveraged and inverse products work. And so we have seen in the US and other jurisdictions some reviews done, also some guidance around who is eligible to buy them. We also know that the recent findings under the new derivatives rule in US, there is going to be a review of complex products, which specifically does include leverage and inverse products. So I think there’s more to come on this probably later on in 2021.

Dan Barnes Some of the other structures we’ve seen are unusual, they’re looking a bit like structured products, aren’t they?

Deborah Fuhr Yeah, they are. So we’re seeing Innovator ETFs have been coming out with buffer ETFs. ALLIANZ just came out with two buffer ETFs, which basically are allowing you to participate in the upside to a cap, and protecting you a bit on the downside. And Innovator has also just come out with three of what they call stacked ETFs, which are magnifying the upside, but giving you some downside protection. These are interesting. I think it’s kind of a trend that we’re seeing where ETFs are moving into defined outcomes. We also see some new tactical products coming to market where they’re doing asset allocation. And then we also have the themes around disruptive technology, again, being something that we’re seeing more products come to market. So continueing the trends we saw last year, also.

Dan Barnes Just on that point about active that you mentioned earlier on, obviously we’ve spoken about this last week when we discussed the fact that active ETFs allow ETF issuers to fight in the spaces not already occupied by those ETF issuers, so we’re just going to scale and very low fees. So the qualities they’re trying to deliver to investors are somewhat different.

Deborah Fuhr Yeah, so active. The goal is that you’re able to pick stocks or do something that’s going to generate alpha, and so we do have a number of different models that are coming forward in the US. So you have those that are transparent, which follow the old guidelines, and then we have semi- or non-transparent models. I think some of the firms are deciding to go forward with the transparent model, because they’re finding that some of the fund selectors have not yet moved to adopt the semi- or non-transparent. And so if they really want to use it across the entire retail and advisor networks, it’s easier if you just go with the transparent model.

Dan Barnes That makes a lot of sense, it’s very interesting. So we’re seeing increasingly, perhaps complex ETFs coming out, is that fair to say?

Deborah Fuhr Well, I would call them structured products, so in defined outcomes. So I’m not sure I would say they’re all complex, but I do think for all of these products, people have to do their homework and make sure they understand what they’re investing in, right? So if you’re looking at a theme and then it’s leveraged or inverse, you really need to realize, that’s a very narrow slice of the investment universe, so you’re taking on more risk.

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

Deborah Fuhr Thank you.

Published on January 12, 2021