ETFs and the nomenclature nightmare

With the expansion of the ETP industry, there has been increased confusion about how each product differs. Trying to pick an ETF among the barrage of products no longer seems as straight-forward. Helen Fowler takes a look at why this confusion has emerged

The exchange-traded product (ETP) industry has suffered from what many consider an excess of acronyms throughout its short life. Within the same category are exchange-traded funds (ETFs), exchange-traded notes (ETNs), exchange-traded products (ETPs) and exchange-traded commodities (ETCs), all of which sound similar to each other. In fact, they all denote radically different structures and risks. Now the confusion has spread to the product where it all started – the ETF itself.

“There is confusion about what counts as an ETF,” says Chris Sutton, senior consultant at UK investment advisory firm Towers Watson. “One of the important differences between an ETF and a mutual fund used to be that you knew what was in an ETF. Some of that transparency has disappeared with the arrival of swap-based and actively managed products.”

The loose definition of an ETF has tended to be that it tracks an index and trades on exchange while retaining the legal structure of a fund. However, not all newer products using the label tick those boxes. “There is a great deal of confusion about what’s what,” says Ben Johnson, director of European ETF research at Morningstar. No legal definition of an ETF exists, adding to the confusion.

“There is a need for a new nomenclature that encapsulates all the newer products,” says Eleanor Hope-Bell, head of the Northern European intermediaries business for ETFs at State Street Global Advisors (SSgA), an industry leader that runs the world’s oldest, largest and most heavily traded ETF – the US$79bn SPDR S&P 500. “The industry needs to help the end investor here.”



Product identification
Providers and regulators around the world are calling for clearer descriptions of products sold under the banner of ETFs, with claims that investors might be misled by poor fund labelling. They argue that the term ‘ETF’ has become debased to the point where it is little more than a meaningless blanket term, with too much potential for misunderstanding.

Industry leader BlackRock, owner of iShares, the world’s largest provider of ETFs, has called for clearer labelling of ETFs. Barbara Novick, the firm’s head of government relations, and Jennifer Grancio, head of iShares’ US distribution, have sounded alarm bells in a research note warning that not all ETFs are what an investor might imagine.