ETF Industry to Face Regulatory Oversight?

The ETF industry has been growing exponentially lately. Per an article by Financial Times citing data released by industry data provider ETFGI, the ETF industry accounted for $4 trillion in assets in the end of June, compared with $580 billion in 2006.

Preference for Passive Investing

Owing to this shift in investor preference for passive investing over active investing via hedge funds or investment managers, the ETF industry has invited great regulatory attention. It has been observed that many investors have developed a disliking toward some of the characteristics of hedge funds such as higher fees and lack of liquidity.

Moreover, ETFs offer a cheap way to gain diversified exposure to the markets. Performance is also a concern. So far this year, HFRI Fund Weighted Composite Index returned 5.5%, compared with 10.7% return of the S&P 500 index.

Regulatory Oversight

The primary reason for the sudden regulatory attention on the ETF industry is because regulators fear that investors will be exploited as the industry grows and market players tend to reduce transparency to the detriment of investors.

Therefore, with the aim of educating investors over the potential risks of ETF investing, major central banks have adopted measures to determine that ETFs are well understood by the masses and ensure transparency when it comes to ownership and pricing policies.

Regulatory oversight has been welcomed by industry players. Per the Financial Times article, Ireland’s central bank called for greater regulations on the industry. This is primarily of great significance because a majority of European ETFs are based out of Ireland and it accounted for $358 billion in assets as of June 2017, per ETFGI.

French policymakers and the United States, SEC, have also expressed interest in reviewing the functioning of the ETF industry.

Let us now discuss a few ETFs focused on providing exposure to U.S. equities.

SPDR S&P 500 ETF SPY

This fund is the most popular ETF traded in the U.S. markets. It seeks to provide exposure to the largest and most-stable companies and tracks the S&P 500 index.

It has AUM of $244.06 billion and charges a fee of 9 basis points a year. From a sector look, the fund has high exposure to Information Technology, Health Care and Financials with 23.30%, 14.91% and 13.94% allocation, respectively (as of Sep 8, 2017). The fund’s top three holdings are Apple Inc AAPL, Microsoft Corporation MSFT and Facebook Inc FB with 3.92%, 2.71% and 1.92% allocation, respectively (as of Sep 8, 2017). The fund has returned 15.19% in a year and 10.64% year to date (as of Sep 11, 2017). It currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Weekly ETF Roundup: Treasury & Gold Shine, U.S. Equity Mixed).

iShares Core S&P 500 ETF IVV

This fund is a low-cost ETF that seeks to provide exposure to large, established U.S. companies and tracks the S&P 500 index.

It has AUM of $126.32 billion and charges a fee of 4 basis points a year. From a sector look, the fund has high exposures to Information Technology, Health Care and Financials with 23.22%, 14.87% and 13.89% allocation, respectively (as of Sep 8, 2017). The fund’s top three holdings are Apple Inc, Microsoft Corporation and Facebook Inc with 3.91%, 2.70% and 1.91% allocation, respectively (as of Sep 8, 2017). The fund has returned 15.32% in a year and 10.77% year to date (as of Sep 11, 2017). It currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: ETFs to Watch on Oil Price Rise and Debt Limit Deal).

PowerShares QQQ ETF QQQ

This fund is a popular ETF that maintains a hefty exposure to U.S. tech companies and tracks the Nasdaq 100 index.

It has AUM of $52.89 billion and charges a fee of 20 basis points a year. From a sector look, the fund has high exposures to Information Technology, Consumer Discretionary and Health Care with 58.70%, 21.30% and 11.76% allocation, respectively (as of Sep 8, 2017). The fund’s top three holdings are Apple Inc, Microsoft Corporation, and Amazon.com Inc AMZN with 12.21%, 8.43% and 6.82% allocation, respectively (as of Sep 8, 2017). The fund has returned 25.51% in a year and 22.13% year to date (as of Sep 11, 2017). It currently has a Zacks ETF Rank #2 with a Medium risk outlook.

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