The Investment Association (IA) has given the green light for exchange-traded funds (ETFs) to join its investment sectors next year.
The move will allow investors to compared ETFs against the existing 3,500 open-ended funds sitting in the IA's 37 sectors starting in Q1 2020.
Eligible ETFs will join the existing IA sectors, allowing a direct comparison between open-ended funds and exchange-traded products.
With over 200 ETFs eligible to apply, the IA is now inviting formal applications from ETF providers for their funds to be classified into the relevant sectors. Applications must be submitted by 14 August.
Consistent with the current approach, only ETFs that are either UK-domiciled, or are EU UCITs with HMRC reporting fund status will be included.
The move comes after a public consultation which took place between 29 November 2018 and 1 February.
Galina Dimitrova, director of investment and capital markets at the Investment Association said: "We want to ensure that the IA sectors reflect the full range of products the asset management industry has to offer savers around the world.
"ETFs are a growing part of this market and their inclusion in the sectors will enable consumers to compare across a wider variety of products."
Industry commentators are generally positive on the move, saying it will offer investors more clarity and also put pressure on active managers in terms of performance.
Joe Parkin, head of iShares UK sales, commented: "ETFs have become a core part of portfolio construction and a 'must-have' tool for investors. We welcome the Investment Association's decision to include ETFs within its sector classifications, acknowledging the increasingly important role that ETFs now play within the UK investment industry."
Meanwhile, Laith Khalaf, senior analyst at Hargreaves Lansdown, said the move is "a sign of the times", as the popularity of ETFs and passives grows, and expects it to drive further flows into the sector.
"It will improve the visibility of ETFs and will also provide greater clarity on precisely how much of the asset management pie these products are attracting," he said.
However, he is concerned that the broadening of the IA sectors could make them less useful as a tool for comparison: "the more difficult it is to compare apples with apples".
"The move however does put greater pressure on asset managers to deliver outperformance to justify higher fees, as their ranking within the sector will depend more on beating passive products," he said.
"I would generally expect ETFs to push other funds out of the third quartile of the sector performance rankings, as after fees we can expect modest underperformance of the index, and hence, give or take, the sector."
Head of active portfolios at AJ Bell Ryan Hughes explained the firm had been "critical of the original proposal" to include ETFs in the IA's sectors "but sadly it seems these have fallen on deaf ears".
He warned the change "will create confusion rather than add clarity, particularly for retail investors", and instead the IA should "add in investment trusts as well as ETFs so investors can compare all the different investment structures in one place".
Hughes added: "I would urge the IA and the AIC to have discussions on this point and find a solution to bring real transparency to investors."
Hortense Bioy, director, passive strategies and sustainability research at Morningstar, applauded the move, saying the inclusion "makes perfect sense".
"ETFs are just vehicles and investors are increasingly becoming vehicle-agnostic; looking to select best-of-breed approaches to portfolio construction irrespective of whether they are a fund or an ETF," she said.
She added that Morningstar has always included ETFs in its investment categories, allowing investors to make comparisons between all types of funds.
Hector McNeil, co-CEO at HANetf, said the move was "encouraging": "ETFs are already winning significant market share from mutual funds - we are at a record AUM of $840bn in Europe and are closing in on $1trn rapidly - but there is huge scope for further growth across UK and Europe."
He added: "We have long argued that ETFs are simply a 'better technology' to deliver investment ideas and will benefit when fairly judged side-by-side with traditional fund products. ETFs are typically cheaper to own, have intra-day liquidity, trading flexibility and daily transparency."
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