Review of index trackers in 2012
Nicole Bastiaansen
AFM on index trackers
Misconceptions
• AFM is a proponent of active investing
• AFM is a proponent of passive investing
• AFM is an opponent of complicated products
• AFM is an opponent of synthetically products
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29 July 2017
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Mission statement
The AFM promotes fairness and transparency
within financial markets
The AFM supervises the conduct of the entire
financial market sector: savings, investment,
insurance and loans
Acting in the interest of client
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29 July 2017
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Acting in the interest of the client
• For example, as a product provider:
– Cost-effectiveness Does the proposition offer good
value for money?
– Usefulness Does the proposition meet a genuine need
of a target group?
– Safety Does the proposition do what it is intended to
do in all kinds of situations, and are the results
acceptable to the target group?
– Comprehensibility Is the proposition not unnecessarily
complicated, and can consumers properly assess its
quality and suitability?
Recent studies on index trackers
• AFM review of index trackers (2010)
• AFM Guidelines on active and passive investing in
the interest of the client (2011)
– The status of academic research regarding the
results of active and passive investing (2011)
• AFM review of index trackers (2012)
• ESMA’s guidelines on Exchange-Traded Funds
(ETFs) and other UCITS issues (2012)
ESMA Guidelines vs. AFM’s recommendation
• Both the ESMA Guidelines and the AFM’s recommendation provide
more transparency and better protection for retail investors and
other investors
• Both reports have a different background and goal:
– The ESMA Guidelines, which emerged from the review of existing
regulations, includes broader recommendations relating to:
information provision on index-tracking UCITS and UCITS ETFs, rules
for UCITS that make use of OTC derivatives transactions and efficient
portfolio management techniques, and criteria for UCITS that invest in
financial indices.
– The AFM’s report, on the other hand, includes a number of specific
recommendations that emerged from the study into the clarity of
various types of index trackers that are marketed to consumers in the
Netherlands.
AFM review of index trackers (2012)
• Contents report ‘Review of index trackers in 2012 ‘
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The theoretical study
The product tests
Content of the testing framework
The findings
What does the AFM expect of the market?
• The report is intended to inform market participants
regarding the AFM’s findings and recommendations as a
result of its review.
The theoretical study: Definitions
• In this report, the term ‘index tracker’ is to be understood as
an open-end listed collective investment scheme (UCITS).
• Funds with an objective other than that of following an index
can also be referred to as an ETF. In this report however,
reference is made exclusively to ETFs whose objective is to
replicate the return of an index.
• Other Exchange Traded Products (ETPs), such as Exchange
Traded Notes (ETNs), are left out of consideration.
The findings
• Comprehensibility of the product structures
– Some product structure are more complex than product structure of ‘plain
vanilla’ index tracker, e.g. synthetic index trackers, leveraged trackers and/or
inverse trackers and physical index trackers with optimisation or sampling.
• Comprehensibility of the information provided
– Information is incomplete or difficult to find
– The costs are not clear
– The type of index tracker is unclear
• Performance indicators
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A different and/or not clearly explained investment policy
The policy of the tracker is different from that of the index
Investment policy is too broadly formulated
No policy formulated regarding counterparty selection and collateral
• Securities lending
Main conclusions
• Index trackers can (indeed) be very simple, but
not all index trackers are comprehensible to
everyone
• Comprehensibility of products depend on
product characteristics and target groups
• More complicated products require higher
standards on the provision of information
Specific recommendations
• As a product provider of indextrackers
– The AFM expects providers to only offer index trackers to consumers
that can be understood by the relevant target group.
• As a distributor/investment advisor
– In the case of advisers and asset managers, the AFM expects these
parties to only recommend products to consumers or include products
in consumers’ investment portfolios that they sufficiently understand
in order to be able to assess the suitability of the product for their
customers.
– Lastly, the AFM expects the providers of execution-only services to
only select products that are suitable for offering via this channel.
What’s next?
• Non-UCITS index trackers?
• Clear distinction for the retail investor between
active and passive investing?
• What is the definition of an index? What criteria?