iShares launches ETF ‘due diligence’ campaign for investors

Oct 20th, 2011 | By | Category: Equities

Following calls for increased transparency and more consistent regulation of ETFs, iShares has embarked on a Europe-wide ‘due diligence’ campaign that will help professional investors evaluate and select exchange-traded products (ETPs).

The iShares initiative has been developed in response to the exponential increase in number, scope and complexity of exchange-traded products over the past few years, and to the challenges European investors now consequently face when analysing this diverse range of products.

As part of the initiative, iShares proposes a new classification system with three distinct types of ETPs: Exchange-Traded Funds (ETFs), Exchange-Traded Notes/Commodities (ETNs/ ETCs), and Exchange-Traded Instruments (ETIs).

In particular, iShares highlights the need for physically replicating and derivative replicating ETFs to be labelled clearly, and the term ETC to be reserved for physically backed commodity products.

The due diligence campaign aims to establish a consistent and robust framework by which professional investors can evaluate and understand structural risk in addition to market risk.

At the heart of the framework is what they say are the six key criteria to be investigated prior to investing in any ETP: Structure, Tax, Performance, Trading and Valuation, Total Cost of Ownership and Securities Lending.

The framework provides a list of questions investors should ask in order to thoroughly compare and contrast the various structures established in iShares’ proposed new classifications. iShares will be holding client events across Europe to explain the Due Diligence framework and what it means to clients.

Commenting on the initiative, David Gardner, Head of Sales for iShares EMEA, said:

“As with any investment product, investors need to be sure the ETPs they buy are appropriate and give them exactly the exposure they want. Our Due Diligence framework, built around six key criteria, puts in place a methodical and robust process that is designed to help investors understand both structural and market risk, ultimately resulting in better investment outcomes.

“We recently proposed a series of regulatory reforms and recommendations for the industry, which included creating global standards for how exchange traded funds, notes and commodities are labelled and classified. Our Due Diligence campaign is a logical and complementary next step, focusing on how we can better support investors to make informed and appropriate investment decisions.”

Christopher Aldous, Chief Executive at Evercore Pan-Asset, a company which provides asset allocation and investment services to pension funds, charities and IFAs, commented:

“The increasing number of ETPs in UK and Europe brings investors many new opportunities.  It also increases the challenge of finding the optimal investment vehicle. This formalised framework from iShares for analysing and evaluating different products from different providers is an excellent initiative and will help improve confidence in ETPs.”

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