A coalition of some of the world’s biggest asset managers, including BlackRock and State Street Global Advisors, are proposing a new classification system to more clearly differentiate among types of exchange-traded products.
The new nomenclature would distinguish between traditional ETFs from structures that use leverage or invest primarily in commodities or in senior, unsecured, unsubordinated debt securities issued by an underwriting bank.
The leveraged product would be called an ETI, for exchange-traded instrument; the commodities investment pool an ETC, for exchange-traded commodity, and the debt product, an ETN, or exchange-traded note.
“At its core, this effort is about increasing transparency for investors,” said Samara Cohen, co-head of iShares Global Markets and Investments at BlackRock, in a statement. “We want to introduce a shared language to help investors know what they own.”
The coalition, which also includes Vanguard, Charles Schwab Investment Management, Fidelity Investments and Invesco, has sent identical letters to the Cboe, Nasdaq and NYSE asking them to implement the change. Coalition members account for more than 90% of the U.S. ETP market.
After noting the collapse in the price of 3x leverage long crude-oil linked exchange-traded notes in April and the 90%-plus loss in inverse VIX ETPs in February 2018, the letter argued that “certain ETPs have greater embedded market and structural risks and more complexity than others” and should be more clearly identified and categorized.
All three exchanges in separate statements from spokespeople said they welcomed an industrywide discussion about the proposed new classification structure.
Industry analysts, however, are not enthusiastic about the proposal, though they support the idea of more transparency for investors, especially for leveraged and ETFs.