Reuters: Regulatory News: Exchange traded products poorly understood-survey

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Exchange traded products poorly understood-survey Mar 27th 2012, 17:11 By Anjuli Davies LONDON, March 27 | Tue Mar 27, 2012 1:11pm EDT LONDON, March 27 (Reuters) - Investors who buy Exchange Trade Products (ETPs) are not sufficiently aware of the distinctions between the different types to understand the potential risk exposures of each product, according to a survey on the subject. The survey, by Edhec-Risk Institute, part of the French business school Edhec, found that only 5 percent of institutional investment and private wealth managers who responded felt investors were sufficiently educated to understand them. "This clearly shows that there is a need for both ETF providers and regulators to help investors understand that one character change in the acronym creates a huge difference, thereby enabling them to take the potential risk exposures into account when investing in ETPs other than ETFs," it said. The survey comes less than a week after recent volatile price movements in a popular but controversial leveraged Exchange Traded Note issued by Credit Suisse. The volatility of the note has raised questions about the role of such products and fears that they are being sold to investors who do not fully understand them. Exchange-traded products (ETPs) is an umbrella term that covers exchange-traded funds (ETFs), exchange-traded notes (ETNs,) and others. ETFs trade like a share, and track an index, either by holding the underlying assets, or by synthetically replicating the returns using derivatives. They are governed under a framework called Ucits - Undertakings for Collective Investment in Transferable Securities - which allows them to be sold in any European Union country after approval from a single member state. Ucits stipulates certain regulatory collateral requirements and restrictions. ETFs cannot invest more than 20 percent of their net-asset-value (NAV) in instruments issued by the same body. ETFs are often pitched to investors as a cheap, transparent and consumer-friendly means of investment. ETNs, by contrast, are based on unsecured debt. They do not fall under the Ucits regulatory umbrella, and expose investors to additional risks such as the risk of an issuer defaulting. In April 2011, the international watchdog, the Financial Stability Board (FSB) called for closer scrutiny in particular of leveraged and inverse products which aim to multiply underlying returns, saying that their complexity and opacity may leave investors exposed to risks they had not anticipated. "People looking at any ETP need to understand what is the structure , what is the underlying and how are they going to achieve it," Scott Ebner, Global Head of ETF Product Development at State Street Global Advisors, whose 36 products sold in Europe fall under the Ucits brand, told Reuters. "When we get away from ETFs that are Ucits fund and start talking about ETPs that have different structures it's even more important that investors understand what the underlying is they should be getting exposition and how they are getting it." Globally, ETP assets under management hit around 1.7 trillion dollars at the end of February, with ETFs comprising just over 1.5 trillion dollars and other ETPs totaling around 200 billion, estimates Blackrock. The survey included responses from 174 institutional investment managers and private wealth managers based in Europe who already use ETFs. Link this Share this Digg this Email Reprints

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