Noticeably absent from the group thus far are BlackRock, which offers iShares ETFs; State Street Global Advisors (SSgA), the company behind SPDRs; and Vanguard. Together, the three industry giants account for $946 billion of the $1.2 trillion ETF industry, according to the National Stock Exchange-dwarfing the assets controlled by the three founding Netfa firms, which is less than $7 billion altogether.
Patti speculates that attorneys at the industry Goliaths may be throwing up legal barriers to keep those firms from Netfa. "They have sizable mutual fund businesses compared to their ETF businesses, so they may feel the Investment Company Institute (ICI) is representing them adequately," he says. In an e-mail, Vanguard spokesman John Woerth confirms as much, noting that "Vanguard has been working closely with the Investment Company Institute for the past several years on ETF issues and believe our interests have been well served by the mutual fund industry's leading trade organization."
But John Hyland, the chief investment officer at United States Commodity Funds and chairman of Netfa, says the ICI falls far short of being an ETF industry trade group. "ICI is a mutual fund industry trade group that happens to have an ETF committee. Period. Our concern is that it has just not been active enough in the ETF space."
James Ross, the head of ICI's ETF committee (and the senior managing director at SSgA), did not respond to an interview request to discuss the committee's activities or elaborate on ICI's ETF efforts. Because the vast majority of ICI's members are mutual fund companies, it's not surprising that the organization puts the lion's share of its efforts into those investment vehicles. But ICI's Web site (ici.org) indicates that ETFs are on the agenda to some extent. It publishes issuance and growth statistics on ETFs, and it has an exchange-traded fund resource center that includes research and commentary. Two research papers posted earlier this year refute the idea that ETFs play a role in intraday market volatility.
Still, Hyland and others saw a gap when no one representing the entire ETF industry spoke at last October's congressional hearing. Instead, legislators heard piecemeal viewpoints from Noel Archard, managing director at iShares; Eileen Rominger, director of the SEC's Investment Management Division; Eric Noll, an executive with Nasdaq; and Harold Bradley, chief investment officer at the Kauffman Foundation, who has co-authored two research papers critical of ETFs.
Hyland noted that some members of the Kauffman Foundation have ties to traditional mutual funds, which could be considered a competing industry. Thomas McDonnell, chairman of the foundation's board of trustees, is the chief executive officer of DST Systems, whose Web site states that the company was established to provide an automated record-keeping system for the mutual funds industry and has supported its continued growth. Harold Bradley, who co-authored studies critical of ETFs and testified about them before Congress, spent 19 years at American Century Investments in a variety of senior investment management positions.
While a unified industry voice is Netfa's ultimate goal, a rift surfaced last year when BlackRock proposed that non-traditional ETFs such as leveraged or inverse products, or those that use derivatives, could be labeled "exchange-traded instruments" or "exchange-traded products," so that investors could differentiate them from plain vanilla ETFs. The idea fell flat with firms that sponsor less traditional ETFs, which tend to be small and midsize businesses.
Andy O'Rouke, senior vice president of marketing at Direxion, a fund concern that sponsors ETF products, said his firm "would be in favor of a new product labeling scheme that is descriptive and educational in nature. We don't believe what has been proposed by BlackRock meets this criteria, but we are open to further discussions and ideas to change the way today's various exchange-traded products are categorized and labeled."
Hyland says a different label isn't really necessary, since leveraged and inverse products are almost always used by hedge funds and other sophisticated investors who fully understand their risks. He also questioned why no one is suggesting different labels for mutual funds.
"When a senator says certain ETFs are too risky, what he really means is that they've lost money," Hyland says. "Plenty of mutual funds have lost money, and use complex strategies, yet they haven't come under the same gun. It seems that ETFs are being held to a different standard than other investment choices without a rational reason."