“The withholding tax is actually higher than [15 per cent] but iShares are proactive in providing the W8-BEN form, which is like a dual tax treaty between Australia and the US, and if investors fill out this form they get the lower withholding tax.
“They’re very proactive in the way they disclose that and in providing information to investors on that issue.”
The providers of ETFs have to deal with two distinct styles of research. There’s the traditional stockbroker-style research (which tends to be bottom-up in nature), and the research more typical of the managed funds sector (which tends to be more top-down).
Graham Smith, business development manager for SSgA, says neither approach is intrinsically superior; rather, they have different objectives and therefore cater to different audiences. Smith says advisers who are deeply into ETFs, and have been using them for several years, tend to blend the different styles of research to gain a more rounded picture of the sector and its products.
Overall, Smith says SSgA welcomes the additional scrutiny that the sector is under.
“We’re very pleased that the main research houses in Australia, as well as the leading stockbrokers – so it’s not just the S&Ps and the Morningstars, it’s the Bell Potters and other brokers – are all starting to provide a lot more scrutiny in this area,” Smith says. “It’s driven by demand. And we’re pleased to
see the additional level of investigation – it shows that ETFs are coming of age.”
Smith says stockbrokers and managed fund researchers “are coming at it from different angles –and they’re deliberately different”.
‘The level of scrutiny the bulk of the fund research guys are going to is very deep, and very appropriate’
“Our experience – and a lot of this is relatively new in the space in Australia – is that the level of scrutiny the bulk of the fund research guys are going to is very deep, and very appropriate,” he says.
“We found that it was a very intense process, and they’re looking for a lot of detail, a lot of detail that we are not used to providing around these listed instruments.
“And the conclusions that they have drawn, we are very comfortable with.”
Smith says the fund research houses are also serving to educate the financial planning community about what ETFs are, how they’re structured and what they are designed to do.
The managing director of iShares in Australia, Tom Keenan, says anything that gives “an independent, third-party endorsement of a product is very beneficial for advisers who want to use ETFs”.
“It solves a compliance issue for them.” Keenan says.
“Research is a critical piece of the ETF ecosystem that is falling into place and will help make ETFs more mainstream – a number of things have to happen for them to become more widely used, and research is one of them.”
Just as researchers say that not all ETF providers are created equal, so ETF providers say that not all research is created equal. Keenan ventures the opinion that“Morningstar is certainly leading the way”.
“They’ve got a significant ETF research capability in the US that they’re very easily able to leverage,” he says.
“There’s no doubt that they’ve taken the lead in ETF research in Australia. And I think Lonsec is doing some good research as well.
“Everyone is still educating themselves on ETFs, and researchers and research houses have had to do the same.”
Keenan says the emphasis of research houses coming from a managed funds background is quite different from researchers from a stock-broking background. Broker research tends to focus on “trading ideas, and the research to back that up”, while the managed fund-style research “is more focused on the structure of the ETF and the ETF provider, and whether that ETF is going to deliver the outcome it says it’s going to deliver”.
“The next step in all of this is for researchers to start providing guidance on how ETFs are used in portfolios,” Keenan says.
“How do you build a portfolio? In time, we’re going to start seeing model portfolios containing ETFs being rolled out by research houses. That will proliferate when we get ETFs across different asset classes.
“Research houses can add value by providing guidance on how to implement asset allocation decisions.
“This is a natural evolution of the industry, but it does start to change, to a certain degree, the services that a lot of these research houses have been providing.”
