New ETF product labelling rules will soon come into effect to help guide investors….

Australia’s exchange traded funds (ETFs) industry is continuing to grow, with more than 300 products now listed on the Australian Securities Exchange (ASX).

But not all ETFs are the same. The category encompasses a diverse range of investment products, including index-tracking ETFs, actively managed funds, and funds that provide investors with access to more complex trading strategies, sometimes through the use of debt and synthetic financial instruments.

Naming convention changes on the way

It’s for this reason that new guidelines will soon come into force that have been designed to better inform and protect investors.

From April the Australian Securities and Investments Commission (ASIC) guidelines will introduce a series of changes to ETF product labels and naming considerations.

The new ETF labelling regime seeks to reduce confusion and assist investors in understanding the risks associated with different types of ETF products. This is why Vanguard has proactively advocated for and supported these changes for several years.

“ETFs come in all shapes and sizes and often deciphering what is ‘under the hood’ of an ETF product can be half the challenge for investors,” says Adam DeSanctis, Vanguard’s Head of ETF Capital Markets in Australia.

“As the ETF industry approaches the $200 billion milestone and with over 300 ETFs listed, understanding the complexities of each product has never been more important for investors.

“The good news for investors is that changes in ETF naming conventions are about to be implemented, which should make the job easier.”

What investors need to know

ASIC has issued specific naming and labelling guidelines to ensure ETF issuers clearly reflect the type and nature of their products to help alert investors to the associated risks. This includes a primary product label, and in some cases a secondary product label.

All primary labels, such as ETF, will need to appear at the end of the product trading name. If a secondary label is applied it will need to appear immediately before the primary label, for example “Active ETF”.

Index-tracking ETFs: Index-tracking products that primarily invest in the physical underlying securities of the index will carry just the primary ETF label without the need to add a secondary label.

Active ETFs: ETFs that aim to outperform a benchmark and primarily invest in physical underlying securities will be classified as an “Active ETF”.

Complex ETFs: The term “Complex” will need to be used immediately before the primary label of any product that falls outside the above definitions. This may include investment strategies that use debt or leverage to make a financial investment; uses short selling; or uses derivatives, other than for disclosed hedging of exchange rate or interest rate risk purposes.

ASIC’s guidelines state that where the ‘Complex’ label is applied, it is good practice for the full product trading name to indicate the specific risks, strategies or features that gave rise to the application of this label (for example, leveraged, inverse, synthetic, hedge fund, long-short).

Rollout time frame

ASIC has recommended a period of at least 12 months should be allowed for the transition to the new naming conventions to coincide with periodic rollovers of the product disclosure statements.

“These changes are a step forward for the Australian ETF industry and are aimed at highlighting the risks and complexities of existing ETF products with investors to drive better outcomes, whilst being hugely impactful in how products come to the Australian market and shape the future,” says Mr DeSanctis.

Rick Maggi