The financial crisis has put the entire industry and all of its various and sundry products – including exchange traded funds (ETFs) – under the microscope. With that, two proposals may affect how certain securities are marketed to you and how they’re priced.
Target-Date Funds. The Securities and Exchange Commission (SEC) recently proposed rule amendments that would require target-date funds to clarify investment goals and change the way they are advertised and marketed. Investors are confused by what such funds offer and how they work, reports Peter Ortiz for Ignites. [SEC Puts ‘Circuit Breakers’ In Place.]
SEC chairman Mary Schapiro says the proposed rules would “enable investors to better assess the anticipated investment glide path and risk profile of a target-date fund.” Additionally, “the rules also would require an asset allocation ‘tag line’ adjacent to a target-date fund’s name in an advertisement.” Critics, though, believe that the SEC may be trying to tell investors what factor to focus on above the many other risk factors in target-date funds.
Other proposed amendments include: A requirement stating that all delivered marketing materials include a prominent table, chart or graph that “clearly depicts the asset allocations among types of investments over the entire life of the fund.” Also, marketing materials need to tell investors to consider their risk tolerance, personal circumstances and overall financial situation.
Expense Ratios. A proposal from the Financial Accounting Standards Board (FASB) could force fund providers to revise the way financial instruments like derivatives and hedging instruments are accounted for, which may consequently increase fund expense ratios, writes Hannah Glover for Ignites. [The Growing Presence of Derivatives: What It Means for ETFs.]
A higher expense ratio could force some funds out of certain brokerages and advisor platforms. Additionally, retail investors who view two funds with similar strategies but different expense ratios may just pick the less expensive one without understanding the actual strategy of the funds. Still, the benefits of this revision may reduce the drag on a fund’s performance.
Clearly, there’s more pressure for full disclosure and more pressure to keep expense ratios in mutual funds fair and transparent. The average mutual fund expense ratio is around 1.5%; if they were to become even more expensive as a result of these rules proposals, it would have the net effect of sending even more investors into the waiting arms of ETFs. [The Fight Against 12(b)-1 Fees in ETFs Hits a Snag.]
For more information on exchange traded funds, visit our ETF 101 category.
Max Chen contributed to this article.