As the number of exchange-traded products (ETPs) in the U.S. has grown over the past two decades, so too has the number of products with different features and varying degrees of complexity. While “ETF” has become a blanket term for any product that offers exchange-tradability, many products labeled as “ETFs” have distinct elements, like the use of leverage to deliver a return that is a multiple of the index the fund tracks or, in the case of exchange-traded notes, exposure to the creditworthiness of the issuer of the underlying debt. As such, we believe that requirements should exist that constrain the application of the term “ETF” to a specific subset of ETPs (Figure 1).
A clear categorization of the different types of ETPs will help investors and the professionals who engage with them (including advisors and broker-dealers) complete a more thorough due diligence process when investing in these products.
A real-life example of the importance of clarity
Recent market events have demonstrated the need for clearer distinctions between different types of ETPs. In April 2020, a dramatic decline in oil prices resulted in a 3x levered crude oil-linked exchange-traded note being delisted with an expected value of zero dollars per note.1 While the decline in value was extreme, this product actually performed as designed.
The call to action: a recommended ETP classification system
While regulators have worked to promote transparency around these products, including disclosure requirements, they have not yet adopted a classification system that categorizes the risks and characteristics associated with different types of ETPs.2
To help advance clearer classifications, on May 13, 2020, an industry coalition of leading ETP sponsors, including BlackRock, Charles Schwab Investment Management, Fidelity Investments, Invesco, Vanguard, and State Street Global Advisors, submitted a letter to each U.S. stock exchange with ETP listings—NYSE, Nasdaq, and Cboe—to enlist their support implementing more consistent identifications and categorizations of ETPs (Figure 1) .
Figure 1: Recommended Categories of Exchange-Traded Products
Many players in the ETP ecosystem, from issuers to exchanges, are well-positioned to help advance ETP classifications. Incorporating consistent ETP nomenclature at the exchange data feed level would not only benefit investors by providing more clarity into specific product characteristics, but also assist brokerage platforms in implementing point-of-sale guardrails to better protect investors.
This initiative is one of the ways in which BlackRock continues to be committed to investor advocacy and education. Click here for more on the latest ETF industry trends.