By ETF Heat Map Team

Several ETFs will be partially immune, and not hampered by the new U.S. regulations that passed last Thursday which requires investment asset managers to take additional steps to increase and match new market liquidity requirements in order to protect investors. The new increased liquidity requirements for certain types of financial products will allow securities providers to more easily meet investors’ redemption demands in the event of a market downturn. After a push back from BlackRock Inc. and other ETF issuers last year, the Securities Exchange Commission (SEC) decided to separate ETFs from a group of less liquid financial instruments that included mutual funds. ETF providers have argued that shares of exchange traded funds are more liquid than mutual funds and provide investors the opportunity to quickly sell their shares to exit the market in the event of a sudden change in their investment thesis or market downturn.

ETFs differ from mutual funds in many ways. One way in which they differ is that ETF shares are sold back onto the market to other investors when an investor wants to exit the market or enter a short position. ETFs are not sold back to the original issuer of ETFs which means the original issuer does not need to fear redemption.

On the other hand, many mutual fund shareholders have the option to redeem their shares for cash by selling their mutual fund shares back to the issuer. Therefore, mutual funds are now required to maintain greater cash reserves in the event of a market sell-off so that mutual fund providers can meet investor demands.

ETF providers will still be required to conduct liquidity risk management according to the SEC guidelines created especially for ETFs; however, ETFs will undergo less scrutiny and will have to do less in order to adapt to the new SEC regulatory rules.

SEC Chair Mary Jo White stated last week that, “It is imperative that open-end funds manage their liquidity carefully, both to ensure that redemptions can be fulfilled in a timely manner and to minimize the impact of redemptions on remaining investors. The recommendation before us today includes all of the essential elements of the proposal, centered on a requirement for funds to establish a liquidity risk management program overseen by the fund’s board of directors.”

According to the new rules, SEC requires most if not all investment securities to be labelled using four classifications that range from “illiquid” to “highly liquid.” Mutual fund managers will also be required to report daily portfolio information including the liquidity of investments and amount of highly liquid reserves held within the portfolio. The new regulations come into effect for larger funds on December 01, 2018, and June 01, 2019 for smaller funds. In addition to the lower costs and greater market diversification, investors can rest assured that are also holding onto readily liquid ETF investments in their portfolios.


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