ETP market contains "a range of risks"

Australia’s exchange-traded products market is performing quite well but requires several improvements to reduce risk, an official review has found.

A review by ASIC, Australia’s financial services regulator, found that “ETPs are meeting the relatively low-cost and liquidity expectations of investors”.

However, the review also “identified a range of risks that require monitoring by issuers and oversight by market operators”, according to ASIC.

“The key concern identified was the potential for the bid/offer spread to temporarily widen, leading to investors paying a spread that would be considered too high, and undermining the relatively low-cost proposition of some ETPs.”

The ETP market includes a mix of exchange-traded funds, managed funds and structured products.

ASIC said market operators and issuers should play a more proactive role in monitoring the performance of ETPs, including liquidity in the market. When operators and issuers observe spreads widening unreasonably, they should take action, ASIC added.

The regulator also recommended that ETP issuers publish the indicative net asset value (iNAV) often enough so that investors and financial advisers can make more informed decisions.

ASIC also expressed concern at the market being dominated by two players, despite an increasing number of new entrants.

ASIC said issuers and market operators should be aware of this risk and find a way of managing it as part of their risk management framework.

“While not many ETPs have closed in Australia to date, ASIC encourages issuers and market operators to develop policies for reviewing and, where necessary, remove from quotation with an orderly wind-down ETPs that may not meet ongoing suitability for quotation, such as very small ETPs that may be uneconomical to operate,” the regulator said.

ASIC said it conducted the review because of the large and growing investment in ETPs in Australia by retail and SMSF investors.