Wall Street participates in single-stock ETFs that take risky exotic turns

Wall Street watchdogs already worried about the risks of single-stock ETFs won’t like what’s ahead: funds offering exposure to individual foreign stocks unbound by U.S. listing standards.

Issuers have filed plans in the past month for at least 129 ETFs targeting non-U.S. companies, most of which do not have depository receipts trading. American Exchange, This generally means that the underlying firms are not required to meet the same financial reporting standards as a US-listed business.

This increases the chances of US investors gaining easier access to foreign companies whose finances may not be completely transparent – ​​putting people at risk of doing business the wrong way.

Steve Sosnick, chief strategist at Interactive Brokers, said, “It seems problematic to allow exchange trading on products that don’t have anything without the risk to companies that might not normally be traded on those exchanges. ” The US has more stringent regulations than other countries, and those standards are “designed to ensure that companies offer adequate disclosure of company profits, losses and risks,” he said.

The proposed funds are still under review, which means the US Securities and Exchange Commission may still block them. However, it is not clear whether this will happen or not. Regulators were vocally unhappy with the idea of ​​a single-stock exchange-traded fund, but that didn’t stop the launch of the first products in July. Since then, there have been about two dozen debuts.

The SEC declined to comment.

big name

The funds employed come from three issuers – Roundhill Investments, Kelly Intelligence and Tema Global Ltd – and mostly target well-known large-cap names such as Samsung Electronics Co., Saudi Aramco and Tencent Holdings Ltd.

Will Hershey, CEO of Roundhill, said the proposed ETFs make sense for investors because such large companies have strong investor relationships and already have many thematic or country-specific funds. He added that institutional investors with major brokerage relationships are already able to invest in them — the ETFs will only expand access to retail investors.

Kevin Kelly, CEO of Kelly Intelligence, said the new product “could be a helpful capital market tool for US investors.”

At this stage, only Tema has filed schemes that go beyond large-cap names. It has proposed products that track several small-cap companies based in India and Indonesia such as Zomato Ltd., Marico Ltd. and Bank Jago. The firm is also focusing on some Chinese companies that already have receipts listed in the US, such as Alibaba Group Holding Ltd and Baidu Inc.

Those names are among nearly 200 Chinese companies that currently face the prospect of being removed if US regulators do not allow U.S. regulators to fully review their audits. Athanasios Sorophagis, analyst at Bloomberg Intelligence ETF, said Tema plans to fund the fund in the hope that the companies’ receipts will be removed from exchanges.

Maurits Pot, portfolio manager for Tema products, declined to comment.

‘Special risk’

Facing an increasingly saturated ETF market, issuers have been rushing to launch single-stock products since the first breakthrough funds arrived in July. That batch gave leveraged or inverse exposure to the daily performance of several major US companies.

He was greeted with a warning from SEC officials. President Gary Gensler said that ETFs “present particular risks,” while Commissioner Carolyn Crenshaw warned investment advisors against recommending them to retail traders. Still — possibly because the fund didn’t break any rules — they were able to list.

It’s not clear whether the results will be the same for the proposed ETFs, which provide one-to-one exposure to foreign companies through swaps.

“Regulators would be concerned about whether there were sufficient disclosures about the underlying company to US investors,” said Chris Shell, capital markets attorney and partner at Davis Polk & Wardwell. “The SEC will review any ETFs So very carefully.”

Sosnik of Interactive Brokers said that even though the risks of ETFs that track well-known, large-cap companies are not likely to be high, their concern is that allowing the products may lead to the risk of funds tracking smaller, more opaque companies. The way will be paved.

“It will be interesting to see how SEC staff respond to the filing volume,” said Ayesha Hunt, an attorney specializing in ETFs and principal at Kelly Hunt. “I think employees will consider the extent to which other floodgates may have been opened with some other type of exposure.”

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