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Thursday, May 14, 2020

The Five Biggest ETF Shops Team Up

Reported by Neil Anderson, Managing Editor

A coalition that includes the five biggest ETF providers is pushing for a new classification system. Yet at least one ETF entrepreneur is crying foul.

Samara Epstein Cohen
Co-Head of iShares Global Markets and Investments
Yesterday, Samara Cohen (co-head of iShares global markets and investments at BlackRock), Anna Paglia (head of legal for U.S. ETFs at Invesco), and Rory Tobin (global of the SPDR ETF business at SSGA) revealed that their three firms, plus Charles Schwab Investment Management and Fidelity, are among the ETF providers who are calling for Cboe, Nasdaq, and the NYSE to standardize the naming conventions for exchange traded products (ETPs). The coalition lays claim to accounting for 90 percent of the U.S. ETP marketplace, and the Wall Street Journal reports that the Vanguard team has also signed the letter sent to the three exchanges.

The coalition lays claim to managing about 90 percent of the U.S. ETP marketplace. BlackRock is the biggest U.S. ETF shop with about $1.542 trillion in U.S. ETF AUM as of Tuesday, according to ETF.com. The other coalition members revealed so far include: the second biggest U.S. ETF provider (Vanguard, with about $1.08 trillion in U.S. ETF AUM); the third biggest (SSGA, with about $673 billion in U.S. ETF AUM); the fourth biggest (Invesco, with about $212 billion in U.S. ETF AUM); the fifth biggest (Schwab, with about $149 billion in U.S. ETF AUM); and the 13th biggest (Fidelity, with about $16 billion in U.S. ETF AUM). (The big five are the only shops with more than $100 billion each in U.S. ETF AUM.)

The coalition proposes dividing ETPs into four categories: exchange-traded notes (ETNs) for ETPs in the form of debt securities; exchange-traded commodities (ETCs) for ETPs investing in commodities and non-financial commodity futures; exchange-traded instruments (ETIs) for ETPs designed to magnify or invert exposure; and exchange-traded funds (ETFs) for more traditional ETPs (that aren't in the other categories).

"At its core, this effort is about increasing transparency for investors," BlackRock's Cohen states. "The presence of multiple product structures can be confusing and through this initiative we want to introduce a shared language to help investors know what they own."

"As the ETP industry continues to mature, the classification and categorization of the ETP product structure should mature as well, ensuring that investors have a clear view of the differentiation between an ETF, and other structures like ETNs, ETCs and ETIs," Invesco's Paglia states.

SSGA's Tobin agrees that "a robust industry categorization system is required."

Yet at least one ETF entrepreneur, Bruce Bond, is already speaking out against the coalition's proposal. Bond is the CEO of Innovator ETFs, which has about $3 billion in AUM in the U.S. ETF business, and he notes that the proposal would lump Innovator's Defined Outcome ETFs in the ETI category.

"The largest exchange-traded funds issuers are trying to break-up and re-categorize the ETF universe to hoard the popularity of the 'ETF brand' for themselves," Bond states. "This is yet another example of how the big firms that make up the ETF industry oligopoly are trying to stifle the very innovation that made the ETF industry what it is. At the end of the day, this is just another attempt to keep more market share — at the cost to the investor."

"No big oligopolistic company can tell us what to call our funds, or how to categorize them," Bond adds. "They're attempting to build wider moats and bigger walls at the expense of smaller competitors and investors." 

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