Exchange traded funds, known as ETFs, are popular investment vehicles that allow you to passively invest in a variety of asset classes, the most popular of which are stock indexes.
Recently, however, the world’s largest money managers, such as Vanguard, BlackRock and State Street, are facing new challenges. These giants with trillions of dollars under management manage ETF funds that invest in the shares of individual companies with the goal of replicating the performance of stock indexes as closely as possible.
ETF
An ETF (Exchangeable Exchange Fund) is a product that tracks the prices of underlying assets. This can be a commodity, a bond, a stock index or a basket of other assets. Unlike mutual funds, ETFs are traded like ordinary shares on stock markets.
However, as these funds invest more and more resources, their stakes in the companies they invest in also grow. In some cases, they are hitting or even exceeding the 10 percent ownership threshold in these companies, which is falling out of favor with regulators who are concerned that these asset managers becoming “too big.”
For example, the US Securities and Exchange Commission (SEC), along with other regulatory authorities in the US, has long monitored the situation when investment funds reach a ten percent stake in a company. special. In some cases, this may lead to the expectation that money will take a more active role in the management of the company, especially if they work in key sectors such as banks.
Critical end
Similar rules have been in place in the past, but regulators have often allowed fund managers to exceed a 10 percent ownership stake, as long as they don’t seek senior positions in the company. . However, this policy may change soon, as the Federal Deposit Insurance Corporation (FDIC) is also considering stricter conditions as well as the SEC.
Vanguard, with assets exceeding nine trillion dollars, said in its semi-annual report that “the new disclosures do not represent immediate changes, but are intended to inform investors of the risks that may arise be related to the ongoing discussions about regulatory ownership restrictions. “
Under Securities and Exchange Commission rules, if an investor owns more than ten percent of a company’s stock, they can be considered an “insider.”
This means that this investor may have access to sensitive information and is subject to stricter rules regarding trading in these stocks. However, “insider” status does not automatically mean that the investor must be actively involved in the management of the company. Any greater involvement in management, such as participation in general meetings or voting on key issues, will depend on the investor’s specific strategy and goals.
Higher costs
ETFs, which are passive investment vehicles and do not aim to manage the companies in which they invest, would face significant difficulties and higher costs if they had to act as active managers of the companies in which they invest. an important part of them. Passive management is the basis of their strategy and allows them to keep costs low, which is a key factor for their investors.
However, active management costs are much higher, which is why funds try to avoid situations where they would have to take an active role in the management of the company. One possible solution for ETFs is to consider keeping their holdings below the ten percent limit to avoid the responsibilities associated with active management.
The remaining investments in the named company could be made by the fund indirectly, for example through the use of derivatives. Direct derivatives allow you to invest in companies without owning their shares directly. However, using derivatives can be more expensive than holding shares directly, as derivatives have inherent costs associated with creating and managing them.
Even a Czech investor would see it
In addition, derivatives are also riskier, which may increase the overall risk of the portfolio. This cost increase would likely be passed on by ETFs to their investors in the form of higher management fees, as Vanguard also pointed out. The Investment Companies Institute (ICI), which represents fund managers, then raised concerns that regulation could limit returns for millions of investors.
“Given the stakes, we urge regulators to carefully consider these implications and avoid changes that would limit the Treasury’s ability to help Americans invest in a secure financial future,” said HERE. according to the Financial Times.
Given the popularity of ETFs that copy global stock indices among Czech investors, any increase in costs related to regulations or the use of derivatives may be seen in the costs of these funds available on the Czech market. These costs would likely be passed on to investors in the form of higher fund management fees.
But how much is the question now, as Jana Brodani, executive director of the Capital Market Association of the Czech Republic, explained to SZ Byznys. “It is difficult to estimate the specific effects of SEC requirements and other market changes that will affect passive funds at this time. However, the difference in costs between active and passive money will certainly decrease significantly. And from both sides,” he says.
In other words, if the costs of passive funds rise, the value of these instruments, which have traditionally been more affordable than actively managed funds, could gradually decline.
2024-08-14 14:15:00
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