9 tips for selling ETFs

Your clients are asking about ETFs.

Due to their popularity, regulators are scrambling to gather information and create clear rules regarding their use.

As a result, the International Organization of Securities Commissions released a paper in March 2012 that outlined best practices to follow when selling ETFs. It was called Principles for the Regulation of Exchange Traded Funds.

It looks at the top regulatory issues related to the funds. It looks at how they’re classified, how their fees are disclosed, and if the products are properly marketed.

Read: How to navigate the ETF landscape

So, next time you offer ETFs to clients, consider these 9 points:

Disclosure

1. Clearly differentiate ETFs from other ETPs (exchange-traded products).

2. Explain the difference between ETFs and traditional investments, as well as between index-based and non-index-based ETFs.

3. Disclose the structure behind all ETFs, especially those using complex strategies or techniques. Discuss their risks and attributes clearly, and make sure your client understands.

4. Explain how an ETF replicates its respective index, asset basket or reference portfolio. Does it replicate an index physically or synthetically?

5. Explain how an ETF’s performance is tracked.

6. Disclosure all fees and expenses.

7. Clearly explain the pros and cons of using leverage to buy ETFs, and the risks of using leveraged ETFs.

Marketing

8. Present a fair and balanced picture of their risks and benefits. Don’t omit any material fact or qualification.

9. Make sure the fund is consistent with the client’s experience, knowledge, investment objectives, risk appetite and loss capacity.

Read:

• What clients find on Google: ETFs
• Bond ETFs are stopping liquidity crunch
• ETF industry poised for growth

ETF structure

In addition to these practices, be aware of regulators’ concerns. Worldwide, they’re assessing whether securities laws and rules appropriately address potential conflicts of interest raised by ETFs.

They’re also considering requiring that ETF manufacturers appropriately address risks raised by counterparty exposure and collateral management.

The paper also states ETF exchanges should adopt rules to avoid liquidity shocks and transmission across correlated markets. For instance, automatic trading interruption mechanisms can pose problems.

Read: ETF trading tips