New disclosure rules signal new era of clarity for ETF investors

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Investors in exchange-traded funds will now receive easier-to-understand documents that will provide greater transparency on the risks, past performance and cost of investing in an ETF.

Beginning Sept. 1, the Canadian Securities Administrators (CSA) requires all ETF providers to produce and file a summary disclosure document called "ETF Facts," similar to what the mutual-fund industry introduced in 2011. Comparable to the mutual-fund "Fund Fact" document, ETF Facts will be delivered to investors in plain language and be no more than two pages, double-sided.

"Today's investors are more savvy, and this regulation will improve the clarity with which disclosure is provided to investors of ETFs and help create a more consistent disclosure framework between conventional mutual funds and ETFs," says Anthony Boright, president of InvestorCOM Inc., one of the handful of companies that create disclosure documents for both the ETF and mutual fund industry.

Mr. Boright says the new document will provide several benefits to investors such as the transparency in how the funds trade, what the funds invest in and the risk level of the fund.

"Unlike industry participants, investors often do not have key information about an ETF and may not know where to find the information," he said. "We also know that many investors do not use the information in the prospectus because they have trouble finding and understanding the information they need."

Implementing new disclosure documents for the ETF industry has been a long time coming for Canada's investment community.

Since July, 2011, every mutual fund has been required to prepare a Fund Facts document for each class and series sold. Starting in June, 2014, every investment dealer was required to deliver the Fund Facts document instead of an investment prospectus when an investor purchased a mutual fund; on May 30, 2016, that changed to require the delivery of the document before the fund was sold.

Last March, a new risk-classification methodology was put in place for all investment funds – including ETFs – and will be required to determine investment risk levels in both the Fund Facts and ETF Facts documents.

"At the end of the day, mutual funds and ETFs are all investment funds, but mutual funds have had this point-of-sale document for quite a while now and there were complaints in the industry that ETFs did not have similar documents," said Steve Hawkins, president and co-CEO of Horizons ETFs Management (Canada) Inc. "Regulators have certainly levelled the playing field from a disclosure perspective."

One element of the document that could be confusing to investors is the addition of trading or pricing information, specifically the average bid-ask spread, Mr. Hawkins said.

"In my view, the reporting of the average bid-ask spread could be more misleading than anything else. … It could create more bias towards the larger and more established ETFs, making it much harder for new ETFs to be brought to market," he said.

The September deadline will be implemented for any new ETFs that file a preliminary prospectus on or after that date, and will require that ETF to have a ETF Facts document posted at the same time.

For all other ETFs, the ETF Facts will be posted upon the prospectus renewal date for each individual class or series of funds. Regulators have set a deadline of Nov. 12, 2018, for all ETF providers to do so.

"Based on the prospectus renewal cycle for ETFs, we anticipate that it could take up to 13 months for ETF Facts to be filed for all ETFs," the CSA said in a notice.

The ETF Facts will be delivered to investors within two days after they purchase the fund, which differs from mutual-fund purchases in which the Fund Fact sheet is delivered before the investor buys a fund.

The CSA expects to consider presale delivery of ETF Facts at a later date in a separate consultation process to create a more consistent disclosure framework between conventional mutual funds and ETFs.

Click here to see a sample of the new ETF Facts document, provided by InvestorCOM Inc.