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Investment Association sectors to include ETFs from Monday 19 April

ETF - Exchange Traded Fund. Trade Market ICO IPO Financial Technology Business Investment concept.

From Monday 19 April, savers and financial advisers will be able to compare over 530 exchange traded funds (ETFs) from the UK’s largest ETF providers within the Investment Association’s (IA) sectors.

Eleven ETF providers – including: Amundi, BlackRock, Fidelity International, First Trust, Franklin Templeton, HSBC Asset Management, J.P. Morgan Asset Management, Legal & General Investment Management, Lyxor, Vanguard and XTrackers – have submitted their ETFs for inclusion, selecting the most relevant sectors for their funds.

The IA sectors allow easy navigation of the open-ended fund market by dividing them into groups of similar funds. The addition of over 530 ETFs will increase the number of funds classified in the 52 sectors to over 4,100 funds.

The inclusion of ETFs in the IA sectors is also leading to wider changes.  The Global Bonds sector, which would have increased in size by 50% (129 ETFs), will be replaced by 14 new bond sectors to be launched on Monday. This will ensure that savers can continue to easily compare bonds funds based on the following criteria: type of bond, credit type and currency focus. The Specialist and Global sectors will welcome the largest number of ETFs, with 79 and 71 ETFs joining each, respectively.

Jonathan Lipkin, Director for Policy, Strategy and Research at the Investment Association said:

“ETFs are a rapidly growing part of the UK fund market.  Their inclusion in the IA sector framework recognises this, helping savers and their advisers to make comparisons and choose funds to meet their long-term financial goals.”

Laith Khalaf, financial analyst at AJ Bell, comments:

“The inclusion of ETFs in the Investment Association sectors may sound like an arcane technical development, but it marks another step into the mainstream for ETF investing in the UK. It will bump up the visibility and comparability of ETFs, and provide a further competitive challenge to active funds and index trackers.

“Plain vanilla ETFs are very similar to tracker funds, in that they follow the performance of a broad market index, and do so at extremely low cost. They can also be held in ISAs and SIPPs just like traditional funds, and so have their gains and income sheltered from tax. Probably the most attractive edge that ETFs offer is they can be traded throughout the day, giving investors greater scope to buy on dips. By contrast, tracker funds work on a forward pricing basis, so you never know exactly what price you will pay. Over the long term this isn’t likely to make a big difference, but some investors like to invest part of their portfolio more tactically, and some simply want to know they can buy and sell immediately, as they can with listed shares.

“ETFs can also be useful to give investors more specialised exposure to particular themes in the market, which active and index funds don’t tend to cover in such a focused way. For instance, the iShares Automation and Robotics ETF tracks an index of companies involved in the robotics and automation industry. The iShares Global Clean Energy ETF is another fund we’ve seen a lot of interest in recently, as demand for environmentally friendly funds has picked up. This was particularly the case in the aftermath of the US election, thanks to Joe Biden’s green spending plans.

“This is where ETF investing starts to become more active than passive, because these thematic funds do carry higher charges than plain vanilla ETFs that simply track a broad market index. Investors also need to pay attention to the construction of the underlying index to make sure it fits their expectations. Every investor knows what the FTSE 100 is, but once you start moving away from the big market indices, you need to have a closer look under the bonnet of the ETF you’re considering.

“At AJ Bell, we currently have 17 ETFs on our Favourite Funds list, covering a wide range of markets, which investors can use as the basic building blocks of a portfolio. We also use ETFs in our own risk-rated fund range, which allows investors to buy a fully managed portfolio suited to their own goals, at very low cost.

“While there are definitely some weird and wacky options in the ETF space, the most popular options with DIY investors show they are predominantly using ETFs to gain exposure to major markets, just as they would an index tracker fund. As ETFs rise in profile, more investors will likely join the growing throng of converts, and their inclusion in the Investment Association sectors will only serve to accelerate that trend.”

Joe Parkin, Head of Banks and Digital Channels in the UK at BlackRock comments: 

“The inclusion of ETFs in the Investment Association’s Sectors reflects the increasingly important role that indexing is playing in the UK Wealth market.  We expect that the UK is entering a period of accelerated growth for indexing across wealth portfolios and that current levels of 10-20% within the portfolios of financial advisors, traditional wealth managers and private banks are expected to double in the next four years. The ability to make like-for-like comparisons between the full range of investment funds available in the UK will be a huge benefit for retail investors and advisers as they to select appropriate products for their investment objectives. ”

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