“A rose by any other name would smell as sweet” Juliet says to Romeo when trying to illustrate it is the essence of a something which is important, not what it’s called. If Shakespeare were alive today, and Juliet were an investor, would he have her say the same things about an ETF? Would she tell her beloved Romeo that an ETF by any other acronym would still invest in an index and be transparent? Should 2014 turn out to be the year of the actively managed “ETF”, the answer is probably no because the essence of what had defined ETFs may completely change.
If it is the essence or function of something that matters, like the sweetness of a rose, then the acronym “ETF” could become misleading. A simple google search of “ETF” in 2013 yields Wikipedia as the very 1st link. In the first paragraph on ETFs Wikipedia states “Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features”.[1] In the 2nd link, Investopedia defines an ETF as a “A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.”[2]
Thus the average investor would probably conclude the function (or essence) of an ETF is to track an index, therefore you know what you are purchasing. It’s fair to assume they might also deduce that ETFs are good alternatives to many mutual funds because ETFs are said to be “cheap” and “transparent”. Since their inception till 2013 ETFs have been synonymous with passive investing, just as roses have always been deemed to smell sweet. This has arguably been a key driver to the success and growth of ETF industry and a boon to investors.
In 2014 we may see the beginning of an unraveling in the commonly assumed (and generally accurate) definition of ETFs because “actively managed ETFs that would be permitted to report their portfolio holdings quarterly” [3] may become typical for many new “ETF” launches. “That would put their reporting requirements on par with traditional mutual funds.”[4] Thus if one uses the acronym “ETF” to describe both active and passively managed strategies a contradiction ensues, unless of course Wikipedia, Investopedia and countless others totally change their understanding of an ETFs essence.
>About Michael Mell
Michael Mell is Associate Director for Custom Indices, at S&P Dow Jones Indices, responsible for the product management of the custom index business throughout the Americas.
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