The Investment Association, the trade body representing the UK’s asset management industry, has launched a consultation to determine whether exchange traded funds should be included in the IA’s fund sector classification.

The IA’s 37 fund sectors allow retail investors and financial advisers to compare the performance of funds sold in the UK by dividing them into groups such as asset class, investment strategy and geographical region.

The IA said it was “minded to include” ETFs in the sector classification system in view of the growing interest from retail investors and financial advisers.

More than 200 ETFs would be eligible to apply to be included within the existing sectors under the IA’s proposal. Most of the ETFs already trade on the London Stock Exchange because they are either UK domiciled or Ucits with HMRC reporting fund status. Gains for investors in ETFs with HMRC reporting status are subject to capital gains tax rather than income tax.

But so-called “synthetic” ETFs that employ derivatives will be excluded initially from the classification. Exchange traded notes, exchange traded commodities and currencies that also have different legal structures to ETFs will also be excluded.

The admission of ETFs will have some modest effects on the average past performance data for the 37 sectors. Including ETFs to the All Companies sector, the largest group, adds around 9 basis points to the sector’s average performance over the past five years.

The admission of ETFs will also lead to the promotion and demotion of actively managed funds in quartile performance rankings across the 37 sectors, a potentially contentious change. The five year performance ranking for the All Companies sector will show no change in the ranking of 122 funds while 30 will move 1 percentile point lower in the ranking and 82 will move 1 percentile point higher.

The biggest shifts in rankings are expected to be seen in the Europe including the UK sector where some actively managed funds could move up 7 percentile points while other shift down 8 percentile points in the rankings.

The inclusion of ETFs in the sectors should also make it much easier for investors to make performance comparisons between passively managed ETFs that track indices and actively managed funds that seek to deliver outperformance even though this is not an objective of the IA’s initiative.

“The primary purpose of the IA sectors is to serve the needs of consumers and their advisers and the addition of ETFs must be done in their best interests,” said Galina Dimitrova, the IA’s director of investment and capital markets.

The consultation, which will close on February 1, is open to ETF providers, wealth managers, advisers, fund platforms and media commentators.

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