Wall Street’s rush on single-stock ETFs takes a risky turn overseas

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

Issuers have filed plans for at least 129 ETFs targeting non-US companies in the past month, most of which do not have certificates of deposit traded on US exchanges. This generally means that the underlying companies do not have to adhere to the same financial reporting standards as a company listed in the United States.

This raises the possibility of American investors having easy access to foreign companies whose finances may not be fully transparent, putting people at risk of making ill-informed transactions.

“It seems problematic to allow exchange trading on products that contain nothing but unvarnished exposure to companies that cannot normally be traded on those exchanges,” said Steve Sosnick, chief strategist at Interactive Brokers. The United States tends to have stricter rules than others. countries, and these standards “are designed to ensure companies provide adequate disclosure of a company’s profits, losses and risks,” he said.

The proposed funds are still under review, which means that the United States Securities and Exchange Commission could still block them. However, it is not known if this will happen. Regulators were openly unhappy with the very idea of ​​a single exchange-listed fund, but did not stop the first products from launching in July. Since then, about two dozen have debuted.

The SEC declined to comment.

big names

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

Will Hershey, CEO of Roundhill, said the proposed ETFs make sense for investors because these large companies have strong investor relationships and are already owned by many thematic or country-specific funds. He noted that institutional investors with prime brokerage relationships are already able to invest in them — ETFs would simply broaden access to retail investors.

Kevin Kelly, CEO of Kelly Intelligence, said the new products “can be useful capital market tools for US investors.”

At this point, only Tema has filed plans that go beyond large-cap names. It has offered products that follow several small cap companies based in India and Indonesia like Zomato Ltd., Marico Ltd. and Bank Jago. The company is also focusing on some Chinese companies that already have US-listed revenue, such as Alibaba Group Holding Ltd. and Baidu Inc.

These names are among about 200 Chinese companies currently at risk of debarment if they do not allow US regulators to fully review their audits. Tema may be planning the funds in anticipation of the company’s earnings withdrawing from stock exchanges, Bloomberg Intelligence ETF analyst Athanasios Psarofagis said.

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

“Special risk”

Faced with an increasingly saturated ETF market, issuers have rushed to launch single-stock products since the first groundbreaking funds arrived in July. This lot provided leveraged or inverse exposure to the daily performance of several large US companies.

They were met with warnings from SEC officials. Chairman Gary Gensler said ETFs “present a particular risk”, while Commissioner Caroline Crenshaw warned investment advisers against recommending them to retail traders. Yet, presumably because the funds weren’t breaking any rules, they were able to register.

It is unclear whether the result will be the same for the proposed ETFs, which provide individual exposure to foreign companies through swaps.

Regulators “would be concerned about whether there was enough information about the underlying company for U.S. investors,” said Chris Schell, capital markets lawyer and partner at Davis Polk & Wardwell. “The SEC would review any ETF like this very carefully.”

Interactive Brokers’ Sosnick said that while the risks of ETFs that track well-known, large-cap companies probably aren’t high, his concern is that allowing the products would pave the way for funds to track smaller, well-known companies. more opaque.

“It will be interesting to see how SEC staff react to the volume of filings,” said Aisha Hunt, an ETF attorney and principal at Kelley Hunt. “I think the staff would consider to what extent other floodgates could be opened with certain other types of exposure.”

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