IIAC sounds cautious note as ETFs face uncharted waters

Investors must remain diligent in evaluating new product risk

IIAC sounds cautious note as ETFs face uncharted waters
Steve Randall

How will ETFs fare when the global economy faces a new crisis? That’s a key question being considered by an industry body.

The Investment Industry Association of Canada says that liquidity in the ETF market is generally perceived as more robust than that in the underlying equity and bonds markets; but the increase in participants in ETFs in recent years raises concern about crisis response.

Given the potential for heavy selling and collapsing values in underlying investments, IIAC has studied the risk and concludes that recent market downturns have not led to issues. Although it notes that ETF liquidity has not been tested in a protracted bear market.

“Regulators in Canada and in global markets closely monitor trends in the ETF markets as part of their ongoing systemic oversight of financial markets,” said Ian Russell, President and CEO, Investment Industry Association of Canada. “This Study concludes the rapidly growing ETF marketplace is robust, liquid and well diversified.”

How can ETF providers mitigate risk?
IIAC has two key recommendations for ETF providers to ensure that liquidity continues to avoid issues:

  • Keep current on changes in regulations, tax and accounting rules and provide this information to investors and adjust their suite of offerings to take into account effects of these changes;
  • Be willing to retire products and strategies that underperform and, in their place, develop new products;

IIAC says that the ETF market is set to continue to show strong growth, especially as its structure is well suited to product development and distribution through traditional and digital advice platforms in a cost-effective manner.

But this growth makes it essential that investors and regulators remain informed and diligent when evaluating the risks and benefits of new products.