A number of articles have emerged since Nov. 8 that highlight the best and worst ETF plays for a Donald Trump presidency. Certain asset classes, companies and sectors — and some of their ETF proxies — seem poised to either benefit or decline. However, a new administration will likely have a greater impact on the ETF industry through its regulatory policy and oversight.
The most obvious impact lies in the fate of the fiduciary rule implemented by President Obama’s Department of Labor, set to take effect in 2017. Many industry experts and pundits now expect that rule to be repealed (see “Is the DOL Fiduciary Rule DOA Under Trump?” page 31).
While many viewed the DOL fiduciary rule as a boon for the ETF industry, another perspective may prevail when examining the rule in a fuller context. The rule itself never specifically pitted passive investing against active, but rather addressed conflicts of interest, typically in the form of alternative payments or benefits to advisors for selecting a certain type of investment for a client. Therefore, the stripped-down fee structure of an ETF would realize greater opportunities for new assets.
While some merit may exist with that notion, it would be naïve to dismiss the mutual fund industry’s willingness and ability to adapt share classes that support those fiduciary requirements, allowing advisors who prefer mutual funds to continue with their use for clients. If the DOL fiduciary rule is repealed, the impact on the ETF space should be minimal.
Trump May Stymie SEC ETF Rule
Some industry observers believe the new administration will seek to repeal or amend other finance-related rules and laws, notably the Dodd-Frank Act. Regardless of whether Dodd-Frank — or any other industry-related legislation — is repealed or amended, the ultimate impact on the ETF industry will derive from the time and resources of the SEC (see Melanie Waddell’s take on the impact of a President Trump).
The SEC’s priorities under the Trump administration will become far more focused on the necessary work to address any challenges. Such action would be similar to when the federal government faced a potential shutdown over the debt ceiling limit; a few weeks in advance of the shutdown, the SEC extensively ceased operations and began putting procedures in place to address the looming stoppage. By shifting its regulatory focus toward other areas under the Trump administration, the SEC may not issue an ETF rule in the near or intermediate term, which would continue an environment where different ETF sponsors maintain different capabilities according to the type of exemptive relief that they possess.
The potential impact of this shift in focus would affect the continued migration of new firms to the ETF space, including active managers, as the SEC would then become less likely to move forward with approval for nontransparent or less transparent actively managed ETFs. With an SEC environment focused on the regulatory oversight of amended and repealed laws, a significant amount of time and resources will be required to address the most pressing changes. As a result, a smaller appetite would exist for both new rules and approvals to interesting new ideas.
For instance, regardless of one’s view on the investment merits of the proposed bitcoin ETF, it would face increased delays for regulatory approval. Remember, transparent actively managed ETFs took almost five-plus years to receive SEC approval, and inverse and leverage ETFs required almost double that amount of time for their eventual green light. While the SEC’s expanded docket may slow the regulatory progress in the ETF space, portfolio managers should still fully expect ETF sponsors to move the industry forward with their continued innovation and ongoing advisor education.
— Read Is the DOL Fiduciary Rule DOA Under Trump? on ThinkAdvisor.