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ETF Upcoming Rule Changes and Industry Trends

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Written by: Ben Hernandez

Since its inception into the capital markets, exchange-traded funds (ETFs) have carved out its own niche, which in turn, have allowed them to grow exponentially and with that rise, industry changes are abound. Douglas Yones, Head of Exchange Traded Products at the New York Stock Exchange, witnesses firsthand what these changes are all about and is keen on where the industry is as well as where it’s heading.

Even as U.S. equities are currently experiencing bouts of volatility, one thing has been constant–the influx of investment capital into ETFs as Yones outlined in the latest “In The Know” update.

“We’ve surpassed $4 trillion globally in ETFs now,” said Yones. “The U.S. market is effectively booming. It doesn’t seem to matter what the markets around us are doing – ETFs are still getting cash flow.”

The Adaptability of ETFs

Because of their adaptability as an investment product, ETFs have experienced exponential growth with respect to capital flows. With over $120 billion in assets coming in domestically, that growth is expected to only continue as more ETFs enter the marketplace.

The proliferation of ETFs has allowed them to corner specific areas around the globe, including emerging markets, and while emerging markets have been decimated in 2018, Yones is still seeing an influx of capital into the EM space. The investor behavior speaks to the popularity of ETFs and investors willing to flock towards these products despite the underlying economic conditions in these areas of investment.

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Whether an ETF is being used as a short-term tool for lightning-quick plays by day traders or as value plays by buy-and-hold strategists, the adaptability of the product is readily apparent.

“It says people are still leaving traditional investment funds and buying ETFs regardless of market conditions,” said Yones. “They’re using them not to just say, ‘Hey, short-term, here’s my strategy,’ they’re using them for long-term core holdings and it shows the growth of the ETF investment across everyone’s portfolio.”

Regulatory Changes on the Horizon

With ETFs growing at a rampant pace, innovation has been a byproduct and companies are finding new ways to accommodate the growth in this space. However, this accelerated growth means that more regulation may be necessary to maintain the ETF industry’s attribute of transparency.

New rules are in the making by the Securities and Exchange Commission (SEC), which will allow for easier, more accessible ETF creation. Rule 6c-11, known throughout the industry as “The ETF Rule,” would permit prospective ETF issuers to organize and operate without the expense or delay associated with obtaining an exemptive order from the SEC.

“This proposal would basically streamline launching ETFs,” said Yones. “If you’re an asset manager, or say even a small manager of funds for your portfolios of clients, but yet you think, ‘Hey, I can make some efficiency here by putting it in an ETF wrapper,’ today that could cost a lot of money.”

With the new SEC law, ETF creators can bypass much of the bureaucratic red tape by following a proposed set of rules without the typical costs associated with a fund’s creation. According to Yones, this would allow for lesser fees to the investor, more product offerings and tax advantages.

For much of its life, ETFs have been the exemptions to rules by financial regulators, but 6c-11 now caters specifically to ETFs—a move that has been a long time coming.

“It makes sense,” said Yones. “This is now an investment vehicle that people know, they love them, they understand them. It doesn’t matter if you’re in the baby boomer generation or a millennial, people are adopting them more and more. So it makes easier for investment managers who have great product ideas to bring them to the market in the wrapper of an ETF.”

More Accurate Price Measures

At the New York Stock Exchange, the focus is on more transparency and expediency, such as the publishing of closing prices. The NYSE is using the help of mathematical algorithms so that investors and issuers alike know the exact price of an ETF at a specific time.

“Any ETF that’s listed here (at the New York Stock Exchange), we now run a calculated value at the end of the day—it an intelligent calculation where we say, ‘Here’s the rough estimate of the price –we look at the bid, we look at the offer, we take the midpoint and we say, ‘That’s the actual value of your ETF.’ It fixes the problem downstream for the investors.”

To watch the entire latest “In the Know” show, click here.

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