Investors, advisers and ultimately the regulator should all be paying closer attention to the underlying construction of ETF products according to Zenith Investment Partners’ Dugald Higgins, who warns that many don’t stick as close to the sector they’re purportedly mirroring as they claim.
Higgins, who heads up Zenith’s real assets and listed strategies department, says the investment research consultancy is coming across an increasing number of retail investors who are unaware of the true nature of their ETFs.
“With a lot of these ETFs… the label on the tin does not match what’s underneath,” Higgins said during a media event in Sydney Thursday. “This stuff can be dangerous,” he added, likening the misdirection of ETF providers to the “gamification” of investing.
“Sometimes from advisers we get questions saying, ‘oh well, what about this ETF?’ And we go, ‘well, hang on a minute, do you actually understand that?'”
Mislabelling is more prevalent in non-core ETF’s, Higgins explained, than core ETF’s, which means the more niche the sector, the greater chance an investor will have that something is amiss.
The consultant acknowledged that the incoming Design and Distribution laws should force providers to be more transparent when they take effect on October 5. It’s hard to gauge the impact the D&D laws will have, however, without knowing what the associated statements will look like, he said.
“We do know that with the D&D laws, if you want to stay in business it’s going to be a game-changer,” he said, before adding: “I think there’s going to be a lot of teething issues with that. I would suspect that I guess another four or five months we’ll find.”
A lot will also depend on how much scrutiny the corporate regulator places on D&D compliance, he said. “[ASIC] don’t really give a guideline of what they want to see, but jeez when you don’t do it they jump on you with both feet.”