GLOBAL - Investors need to be aware that they cannot exercise their ownership rights with certain types of exchange-traded funds (ETFs), according to the International Corporate Governance Network (ICGN).
"Investors have a right to vote with their shares," said Carl Rosén, executive director at the ICGN. "With ETFs gaining a lot of market share in Europe, it is important to highlight the fact that investors invested in ETFs which use derivatives to mimic an index are not able to exercise their voting rights."
ETFs that own their underlying assets and do not use derivatives normally have corporate governance and voting policies in place, allowing investors to exercise their rights, said Rosén. He believes a lot of institutional investors lack the understanding of how ETFs are structured, which is why he is calling for more transparency on the issue.
"Investors have to exercise their ownership rights in order to get the market or the companies functioning better," said Rosén. "Active ownership is high up the agenda for most principle investors, but also asset managers. Therefore, it is important to be more transparent about the structuring of ETFs if this leads to lesser impact from the owners, which is not good for the market."
The equity ETFs provided by Lyxor invest in a basket of stocks as collateral and a swap with Société Générale, which delivers the performance of the index tracked by a fund.
In response to the arguments made by ICGN, Lyxor noted it does not exercise the shareholder rights underlying its products.
"The end investor does not receive the performance of the underlying shares held in each fund and thus the holders are not concerned by the performance of the stocks held as collateral," said Claus Hein, director, head of Lyxor ETFs for the UK, Nordics & Latam.
"As a result, Lyxor does not exercise any voting rights related to these shares, as the investor is not affected by the management of the corresponding companies. Following UCITS III guidelines, the synthetic replication mechanism provides better tracking and the ability to offer products which can provide effective exposure to difficult to access markets."
Hein continued: "Regarding ETFs which invest in the underlying index shares to track a benchmark, it is our understanding that the investor is only able to exercise voting rights in the Fund shares but not the underlying stocks held by the ETF. Investors in Lyxor ETFs also have the right to vote in the Fund shares but not the underlying stocks."