From Q1 2020, investors will be able to compare ETFs against the 3,500 funds already in the IA’s 37 sectors for the first time.
With over 200 ETFs are eligible to apply, ETF providers need to submit formal applications by 14 August for their products to be included in the sectors in the initial batch. ETFs will then be added on a rolling basis.
To be included, ETFs must be physically replicated and be either UK domiciled or are EU UCITS with HMRC reporting fund status.
The decision comes after a public consultation which ran between 29 November 2018 and 1 February.
Galina Dimitrova, director of investment and capital markets at the IA, commented: “We want to ensure that the IA sectors reflect the full range of products the asset management industry has to offer savers around the world.
“ETFs are a growing part of this market and their inclusion in the sectors will enable consumers to compare across a wider variety of products.”
Adam Laird, head of ETF strategy, northern Europe, at Lyxor and chairman of the IA's ETF committee, added: "This is a real victory for ETFs. Both individuals and wealth managers often use the IA sectors as a starting point for investment selection and it will help investors judge performance, both of which should further increase ETF flows."
Christine Cantrell, ETF sales director at BMO Global Asset Management, said the decision would help ensure investors consider ETFs equally against mutual funds.
"It is evident that some rules-based methodologies followed by ETFs can consistently deliver the required outcomes for investors and now the data will be more accessible to compare ETFs to active funds with similar objectives, providing greater transparency.
"Where ETFs and index tracker funds have the same benchmarks, it will be easier to compare them based on cost, tracking and consistency. From a cost comparison perspective, investors will also be able to discern which fund managers can avoid the fee drag on their long-term performance compared to ETFs which aim to minimise costs."
Hortense Bioy, director, passive strategies and sustainability research at Morningstar, said: "The IA decision to include ETFs in its sectors makes perfect sense. ETFs are just vehicles and investors are increasingly becoming vehicle-agnostic; looking to select best-of-breed approaches to portfolio construction irrespective of whether they are a fund or an ETF. Investors are simply looking to select the type of vehicle that best meets their needs."