|ETF Securities Defends Its Brand|
|July 27, 2012 11:09 (CET)|
ETF Securities, Europe’s largest issuer of exchange-traded commodity trackers (ETCs), has defended its brand name in response to a critical comment from Europe’s securities market regulator, ESMA.
In its guidelines on ETFs and other UCITS issues, released earlier this week, ESMA said that it was "concerned by other exchange-traded products which are not UCITS and that may use the word ‘ETF’ in their name. Such practice may create confusion for investors and ESMA believes that appropriate actions should be taken to address this issue".
UCITS ("Undertakings for Collective Investment in Transferable Securities") are investment funds authorised for distribution to retail investors across the European Union. Totalling over €6 trillion in collective size, UCITS also enjoy wide popularity beyond Europe, notably in Asia and South America.
ESMA’s comment appears targeted primarily at ETF Securities’ exchange-traded commodities and currencies ranges, which include both the labels “ETF” and “ETC” in securities’ names (for example, “ETF Securities Physical Gold ETC”).
The firm currently manages US$26 billion in assets, the majority of which is invested in securities tracking the prices of individual commodities. Under current European regulations, a fund cannot be structured around a single underlying asset as this would fall foul of the minimum diversification requirements set for funds.
ETCs and ETNs (exchange-traded notes) are debt securities, regulated by the EU’s prospectus directive, whereas ETFs are funds. In Europe, most ETFs are regulated under the EU’s UCITS framework, which sets strict criteria for asset diversification, counterparty exposure, oversight by a fund management board and the use of an independent custodian.
Most ETNs (and bank-issued, index-tracking “certificates”, which ETNs closely resemble) are uncollateralised, meaning that an investor carries full credit exposure to the issuing entity and faces large losses in the case of the issuer’s default.
Almost all of ETF Securities’ ETCs, however, now carry collateral backing, a move the firm took after the 2008 near-failure of insurer AIG caused several AIG-backed ETCs to fall far below fair value in secondary market trading. ETF Securities’ precious metals ETCs, the firm’s most popular commodity trackers, have since launch been backed by metal held in third-party vaults, while in 2010 the firm also launched a range of physically backed, industrial metal trackers.
Graham Tuckwell, ETF Securities’ chairman, defended his firm’s use of the label “ETF” in commodity trackers that are formally not funds.
“The market has evolved to accept ‘ETF’ as a generic term for something that’s transparent, traded on-exchange and liquid, not necessarily for something that’s a fund or a UCITS fund. The [US-listed] SPDR Gold ETF isn’t a fund, for example—it’s a grantor trust. You can’t change people’s jargon overnight and I don’t think it’s necessarily correct to do so,” said Tuckwell in a telephone interview with IndexUniverse.eu.
“Let’s not get Europe and the US out of line,” added Tuckwell. “If they want to change the naming rules, let’s all sit down and do it together. But I don’t think people look at ETFs and say ‘this must be a mutual fund.’”
In the US ETF market, the world’s largest, the generic term “exchange-traded fund” is used to cover several legal structures, including open-ended funds that are regulated under the Investment Company Act of 1940, grantor trusts, which follow the 1933 Securities Act, and unit investment trusts, which are also regulated under the 1940 Act, but which have to replicate the underlying index in full and may not reinvest dividends, lend securities or use derivatives.
Tuckwell, however, supported ESMA’s proposal to require all ETFs that are compliant with the UCITS rules to name themselves accordingly.
“I think it’s an excellent idea for the regulator to insist that UCITS ETFs include a label to this effect. If you want to defend the UCITS brand, put it in the fund name,” said the ETF Securities chairman.
“But if it’s not there, you can’t necessarily assume that an exchange-traded product is a fund, and that’s fine in my opinion,” he continued. “I think there are some people out there who are jealous of what we’ve been able to do and are trying to have a crack at us. ETP, ETF, it’s pretty much the same in many people’s jargon.”