Aldous said both regulators and providers should differentiate between simple and complex ETPs as, while the products are commonly perceived to be simple, low-cost tools for tracking well established indices, more complex structures have begun to be developed.
He added that these more complex products have similar names but may use leverage, short sell, track illiquid underlying assets or use active management techniques, which will all add unexpected levels of risk to the ETP.
To protect investors, EPA said these more complex ETPs should be clearly labelled explaining the difference in structure.
EPA said: “In 2008, when some hedge funds and investment banks faced difficulties, ETFs remained strong. However, regulators are right to raise concerns about the risks involved and EPA believe that the first step towards this should be a clearer, less confusing classification between the various types of ETP.
“It would assist potential buyers and holders of ETFs to have guidance in place to demonstrate that non-complex or ‘simple’ ETFs are a liquid and a cost efficient way to buy into an asset class. It would also help investors to have the riskier and more complex products renamed.”
