Industry Coalition Advances ETP Classification
Since State Street launched the first exchange traded fund (ETF) in the United States in 1993, ETFs have become an increasingly popular investment vehicle. Today, the more than 2,000 ETFs listed on US exchanges1 provide all investors efficient, cost-effective and transparent access to markets.
ETFs’ exponential growth has sparked the proliferation of more structurally complex exchange traded products (ETPs), including exchange traded notes (ETNs) and levered and inverse ETPs. Yet, while these products pose very different risks to investors than do traditional index or basket-tracking ETFs, many ETPs have been categorized—by investors, the press and exchanges—as ETFs.
On May 13, 2020, State Street Global Advisors was proud to join BlackRock, Charles Schwab Investment Management, Fidelity Investments, Invesco, and Vanguard in asking the exchanges to implement a classification system that categorizes different types of ETPs in a way that more accurately reflects their inherent complexities, structural features and risks.2
Recent market events underscore the need for investors to understand the greater risk posed by some ETPs:
- April 2020: The dramatic decline in oil prices resulted in a 3x levered long crude oil-linked ETN being delisted with an expected value of zero dollars per note.3
- February 2018: A steep drop in equity benchmarks coinciding with a large one-day increase in the VIX resulted in several inverse VIX ETPs suffering declines in excess of 90%.4
To help ensure that investors understand that complex products or those with more narrowly tailored investment objectives can have greater embedded market and structural risks than do others, the industry coalition has asked each US stock exchange with ETP listings—NYSE, Nasdaq, and Cboe—to implement more consistent identifications and categorizations of ETPs.
By providing investors with a high-level view of products’ varying characteristics and risk, the coalition’s ETP classification system supports due diligence from a common starting point.
We have asked the exchanges to use these definitions to categorize the different types of ETPs at the data-feed level:
This classification system will help investors understand the varying outcomes a fund might have, based on what it holds, or other relevant features of the construct. Longer term, the proper identification and categorization of ETPs will help investors to make more informed investment decisions.
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