In 2019, after years of wrangling, U.S. regulators finally overhauled the rules governing exchange-traded funds to make things simpler, fairer and more efficient.
The changes came just in time.
Within months a pandemic was spreading chaos through markets and the investing world. But the $4.9 trillion ETF industry not only survived, it has gone on to thrive -- thanks in no small part to the rules introduced in December.
Known collectively as the ETF rule, the regulations boosted the pipeline by streamlining the approval process for new offerings. Their guidelines on structure have supercharged innovation. Lower disclosure requirements have lured a host of first-time issuers.
“It was a very long time coming,” said Linda Zhang, chief executive officer of Purview Investments. “The rule really modernized the framework for an industry that has been growing exponentially.”
As a result American ETF assets have climbed to a record despite multiple crises this year, from the fastest-ever bear market to historic dislocations in fixed income and even negative oil prices.
Almost one year after it came into force, here’s a closer look at how the ETF rule has reshaped -- and perhaps rescued -- the industry.
Ready To Launch
There was a moment in March when ETF industry growth looked thwarted. Markets were in turmoil, investors were pulling cash out of multiple assets and fund launches ground to a halt.
Yet many firms had already begun the creation of new ETFs thanks the elimination of the need for a special Securities and Exchange Commission order to allow funds to operate. While the virus-fueled volatility caused some firms to temporarily hit the pause button, as evidenced by just 4 new ETFs launching in March, 22 new funds appeared in April, many hoping to catch a market updraft. The year’s explosion of new ETFs had begun.
“Now, you can launch if you’re smaller, it’s faster, you don’t need to spend as much money,” said Eric Balchunas, ETF analyst for Bloomberg Intelligence. “I think we could see a ramp up in ‘indie’ launches,” he said, referring to releases by less well-known issuers.
More than 200 funds have started trading in 2020 so far, about 40 more than at the same time last year, according to data compiled by Bloomberg.
March Of The ANTs
Among the debuts is a new kind of fund made possible by the regulatory shift.
Active non-transparent funds, known as ANTs, allow issuers to hide holdings. That paves the way for stock pickers to offer their strategies in an ETF wrapper without the fear of rivals copying plans or front-running trades.
American Century released the first of these in April, followed by T. Rowe Price Group Inc. and Fidelity. And Invesco Ltd. is moving ahead with its own version.
While ANT inflows have been slow to date, industry observers are closely watching performance and expect this breed of fund to grow in popularity as it becomes better established.
“With both existing and first-time ETF managers launching these products and some choosing multiple structures, it’s an exciting microcosm of the ETF market,” said Ryan Sullivan, senior vice president of Brown Brothers Harriman’s global ETF services.