Exchange-traded funds (ETFs) have become very popular in recent times since they combine the diversity of mutual funds with the ease of stock trading.
ETFs had a great year in 2017 and things could end up becoming event better based on the upcoming Securities and Exchange Commission (SEC) meeting which is scheduled to take place on June 28.
One of the limitations that hold ETFs from being as widely traded as other market products are the rules that are set forth by the Investment Company Act of 1940. This old law mainly focuses on mutual funds, but because of their similarity to mutual funds, ETFs have been put under the umbrella of the act.
However, because of the fact that ETFs are traded constantly like stocks, they need to ask the SEC for an ‘exemptive relief’ so that they can be priced and traded like stocks.
The meeting on June 28 will look to change that. The suggestion is that a new ETF-specific rule will be implemented that will allow ETFs to skip this exemptive relief request and just have them follow generic-release standards. This will make it easier and simpler to start new ETFs.
In a statement, Phil Bak, the CEO of Exponential ETFs said
This would be a change that is long overdue. It reflects that ETFs are no longer the exception, but the rule for how investors want to access markets. It's about time that they had a rule for themselves, and not one that held them to the standards of mutual funds. This rule has been suggested for years; that it is finally starting to get traction shows you how far the industry has come.
New Rules Will Boost ETF Market
When this rule is implemented, a new ETF will only cost around $50,000 to $75,000 to start up. That's a big difference in the trading world. Besides that, the start-up time for an ETF will be a lot shorter. Currently, a new ETF requires 75 days of processing before it can appear on the market.
The lower fees will be passed on to potential traders which means cheaper trading, allowing those who would not be normally trade in ETFs an opportunity to get in on the action. There are currently 1,900 ETFs on the market right now. The total asset value is around $3.5 trillion which makes up nearly 6 percent of the equity market.
That's not bad for a product that only appeared in 1993. The main competition for ETFs is mutual funds. With this new rule, there should be a more level playing field between the two, giving ETFs a fair chance and a big boost in the financial market.