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Jeremy Senderowicz, Vedder Price
Jeremy Senderowicz, Vedder Price

ETF trends – the lawyer’s view

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Jeremy Senderowicz, a member of the Investment Services Group at law firm Vedder Price, has witnessed a steady upswing in ETFs over the last 20 years.

Senderowicz specialises in funds and asset managers and notes that there is always a demand for novel strategies in ETFs but cautions that they are limited by the Investment Company Act which, he says, applies stricter limits to funds in the US than certain local regulations in Europe.

This particularly applies to parameters around the use of leverage and derivatives, both of which can be used in active ETFs.

“The UCITs structure allows the use of multiple share classes far beyond what is allowed in the US,” he says. “Liberalisation in the use of share classes may come but leverage won’t be allowed beyond the limits of the Investment Company Act.”

The emergence of ETFs based on cryptocurrencies and the recent regulatory breakthrough which allowed launches of spot bitcoin ETFs in the US has been ‘very interesting’ Senderowicz says.

“The first generation of bitcoin ETFs was rejected and now we have a whole bunch of funds so maybe people try to work out variations as the next step in product development,” he says.

Active ETF management is definitely a growth area, he says, with a lot of active managers piling in. He has also observed a steady growth in the conversion of mutual funds to ETFs. 

“The case for ETFs as a separate share class of a mutual fund has lots of optimism for it is compelling,” he says, adding that it is still not feasible to convert a mutual fund that has a number of retirement plan investors within it to an ETF. “A relaxation of the existing restrictions on offering ETFs as share classes of mutual funds would enable them to have the best of both worlds.”

In terms of the growth in active funds in an ETF format, Senderowicz says that while some private fund managers have created ETFs, hedge funds that rely heavily on the use of leverage don’t translate into ETFs easily. “But there is more acceptance of active trading with ETFs,” he concludes.

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