Security of ETF’s
What are the governance risks when investing in an ETF rather than the underlying equities? ATEC is a good example.
Craig
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Answer
Hi Craig,
That’s a broad question as there is governance in various aspects when running a financial services company. Like Market Matters, the ETF provider has an Australian Financial Services Licence (AFSL) licensing them to offer ETF’s and with that comes a lot of requirements around financial performance, competences of employees and the like. It also prescribes requirements around capital and liquidity. BetaShares is the company behind ETEC and they have over $17bn in assets under management. BetaShares is actually owned by Mirae Asset Global Management, one of the largest asset managers in Asia who invest almost $US200bn of clients funds. However, when buying an ETF we are not relying on that company to stay afloat. As holders of the ETF, we own the underlying assets within the ETF. These are held through what’s called a custodian, who’s roll it is to hold the ETF assets for the benefit of the unitholders.
This is similar to holding your personal assets in a safe custody box at your local bank, although of course the value of the ETF’s assets will rise and fall depending on market conditions. This structure mitigates the risk of investors being exposed to the fund manager’s own financial risk, by separating the fund manager (and its own assets and liabilities) from the assets of the actual fund.
