Department of Labor’s fiduciary rule set to boost ETF industry growth

Jun 14th, 2017 | By | Category: ETF and Index News

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The exchange-traded funds industry may be set for a further boost in investor demand following the introduction of the US Department of Labor’s ‘fiduciary rule’ aimed at financial advisors.

Department of Labor’s fiduciary rule set to boost ETF industry growth

Some market commentators, such as analysts at BNY Mellon, have predicted the new fiduciary rule could help the global ETF industry reach $10 trillion in AUM by 2020.

The rule, launched on 10 June 2017 (although technically not enforceable until January 2018), stipulates that US-based retirement advisors must act in their clients’ best interests when recommending investment products, prioritising investment suitability and affordability over the advisor’s ability to earn fees or commissions.

While the rule does not give specific guidance, such as setting a maximum fee threshold over which the advisor may no longer recommend that investment, the range of benefits attributable to ETFs including their low costs, transparency, ease of access and tax advantages make them prime candidates to benefit from the rule’s implementation.

Although an investment in an ETF is by no means automatically a sound investment in general, there are a plethora of funds available now that offer passive exposure to most major broad market benchmarks at a lower cost than previously available under other investment vehicles. With an increasing body of research showing that most active funds are failing to outperform their benchmarks, even before considering the active manager’s higher fees, the trend to low cost passive investing seems unlikely to falter anytime soon. Furthermore, greater competition in the ETF space is predicted to reduce the number of ETFs which are less efficient at tracking their benchmarks and further drive fees lower.

Some market commentators have even stated their belief the rule will contribute to the size of the global ETF industry doubling within just a few years. For example, BNY Mellon has indicated it believes the industry may top $10 trillion by 2020 – globally listed ETP/ETF assets are sitting just above $4.1 trillion according to data from London-based ETF industry consultant ETFGI as of the end of May 2017. The US ETF industry, representing approximately 72% of the global ETP/ETF assets under management, is set to be the main beneficiary of the new Department of Labor legislation.

A pickup in the growth of ETF assets may begin to be realised sooner than the rule’s effective enforcement date in January with advisors and firms being asked to act in “good faith” and demonstrate their ability to act in line with the fiduciary standard.

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