Published March 6 2012 | "ETFs - How to calm investor's nerves" | March 2012 SUI News

The Smarten Up Institute recently had the opportunity to talk with Patricia Dunwoody, CETFA’s General Manager, about the evolving market of exchange traded funds (ETFs). Canadian investors have approximately $40 billion invested in more than 200 Canadian-listed ETFs. As ETFs gain in popularity they will start to be a greater focus of the regulators and the investment professionals need to be prepared.

So what do Canadian investment professionals need to know about ETFs? “ETFs are no longer what they were when they launched 20 years,” said Pat Dunwoody. “Investment professionals have to understand exactly what the ETF is following and look at portfolios deeper than they used to and deeper than they would with a mutual fund.”

ETFs are more complex than just a security that tracks an index so advisors need to make sure that the ETF is rated appropriately. Rating systems have yet to be set up and standardized language yet to be developed. Advisors need to ensure that risk classifications are accurate for their clients. The compliance department needs to stay on top of new ETF products as they hit the markets.

Additionally, ETFs have come under attack in the media in recent months voicing concerns about how complex the products have become for retail investors and focused on potential risks of the product. Terry Smith, founder and CEO of Fundsmith out of the UK, was quoted in the Financial Times as suggesting that ETFs “are almost certainly being mis-sold” and that many investors who “think ETFs are simply index funds” are unaware of some of their complexities.

Canadians tend to associate the same characteristics of volatility as in the US and European markets. It is a question of education of both the investment professional and the client. ETFs are not a low cost form of index tracker. They are a complex vehicle that can allow investors to diversity into different asset classes and geographies as well as offering intra-day liquidity. Thus advisors should ease a client’s nervousness and bring a client into the product line slowly. Advisors need to know their product in order “ to able to set clients’ fears at rest that the regulatory regime is different in the Canada,” said Pat Dunwoody, Canada has a stronger regulatory environment.”

The CETFA seeks to educate Canadians on the appropriate usage of exchange traded funds, as well as work proactively with members and regulators to ensure the ETF industry adopts best practice standards. The CETFA will be a go-to place for product providers to have one voice concerning ETFs. CETFA will be two things: a resource portal for questions about ETFs and, more importantly, educate and ensure that information that is out there in the media is accurate.

Investment professionals should choose to stay ahead of the curve and be a part of the development as the industry grows.

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