ETF industry accused of poor practices

A portfolio manager says ETFs, like many mutual funds, are engaging in practices that “lead to a poor investor experience”

In a blog post published on the Steadyhand Investments website, Portfolio Manager Salman Ahmed admits that while he likes ETFs, he sees changes in the ETF space that are not in investors’ best interests.

“Like any growing industry, the Canadian ETF space is changing, but many of the changes will lead to a poor investor experience,” he says. “ETF providers are increasingly engaging in the same bad behaviors that the mutual fund industry has been guilty of.

He first points to the “impressive” product proliferation: despite the fact that there are only 17 ETF providers in Canada, around 130 new ETFs have been launched since 2015.

Next, he observes a “flavor of the month” attitude in the industry, specifically surrounding actively managed ETFs. Citing marketing labels such as “smart beta” and “low volatility ETFs”, Ahmed notes that “[a]round 80% of ETFs launched in the last 18 months have an active element to them”.

This, he says, runs counter to ETF enthusiasts’ advocacy for low costs, broad market coverage, and passive management.

He sees a similar problem in the use of confusing product descriptions, wherein ETF providers attempt to differentiate their offerings through complexity. This prevents investors from understanding the strategies employed and the risks involved.

Finally, Ahmed states that while median management fee charges for mutual funds are larger than median values for comparable ETF fees, the gap is trending the wrong way, as active ETFs are causing management fees to increase.

Mutual funds and ETFs, he concludes, are simply different investment vehicles that investors can use to implement a strategy and achieve their goals. However, it can be difficult for investors to ferret out the worthwhile mutual funds from the sea of snake oil offerings, and the same may currently be said for ETFs.

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