ETFs, Investments

Volume makes ETF weaknesses more significant

ETFs capital volume

The volume of capital allocated to ETFs is making some weaknesses of these investment vehicles more of a concern, a fund manager has said.

An Australian-based fund manager has warned certain concerning characteristics inherent in exchange-traded funds (ETFs) have become more significant due to the volume of capital invested in these vehicles.

“Some of the ETFs are not exactly what people think they are buying into and we do think that long term some of the ones with gearing in them, some of the ones with more esoteric or less liquid instruments in them are cause for concern,” SG Hiscock managing director Stephen Hiscock said during a briefing in Sydney today.

Hiscock pointed out the ETFs only mirroring an index were not the ones to cause this type of worry, but noted a separate characteristic had to be taken into account that applies to all of these types of offerings.

“With some exceptions, they lack a little bit of active governance so they generally don’t vote as actively as an organisation like ours does,” he said.

“We vote on everything. Every single holding we have we meet with the management, we talk to them about their resolutions for their AGMs and we vote.

“The way a lot of the ETFs do it, if they vote at all, is they simply just follow the recommendation of whichever ratings agency they use and they don’t really spend a lot of time on governance.

“Again that’s been something that has been the case for ages, however, their staggering increase in size means an increasing portion of equity ownership is now subject to more passive governance elements.”

According to Hiscock, it means ETFs may not have aligning interests with investors who value the environmental, social and governance elements of a company as these investment vehicles will not necessarily play an active part in monitoring these issues.


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