ASIC has added an exchange-traded funds (ETF) section to its MoneySmart website to help investors understand the different types of ETFs and their risks.
The corporate regulator categorised ETFs as complex investments, alongside contracts for difference, agribusiness schemes, hedge funds, collateralised debt obligations, stapled securities, futures and options, and capital-protected investments.
ASIC chairman Greg Medcraft said the regulator wanted investors to be informed and confident about investing in ETFs.
“While conventional ETFs are often relatively straightforward, there are complexities and risks to be aware of. Furthermore, the use of derivatives by synthetic ETFs creates separate additional issues for investors to consider,” Medcraft said.
The MoneySmart website listed tracking errors, price errors, securities lending, exposure to less liquid investments and derivatives, counter-party risks and currency risks as some of the complex features that can apply to physical ETFs, synthetic ETFs and sometimes both.
“Physical ETF prices will not exactly follow the price of the index or investments they are designed to track. This tracking error may be caused by fees, taxes and other factors,” it said.
“Synthetic ETFs use derivatives to track the performance of the underlying assets. The extent of any tracking error depends on the specific features of the synthetic ETF.”
In terms of price errors, the website said ASIC had found examples of ETF prices quoted by stockbrokers that were significantly above or below the value of the assets the ETF held.
“The risk is that you might pay far more than the ETF’s assets are worth, or sell ETFs at a price far below the value of their assets,” it said.
Physical and synthetic ETFs might also use securities lending, transferring some of their assets such as shares to other companies for a fee, it said.
“The risk is the borrower will not return the securities as promised. While some loan security is usually provided, risks remain,” it said.
According to the Australian Securities Exchange, the ETF market was worth $4.7 billion at the end of April, an increase of 39 per cent in one year and representing 700 per cent growth in five years.
