Time Is Now For Improved ETF Naming

Yesterday Congress heard testimony from a few sources, including Blackrock, who advocated more precise naming conventions for the hodgepodge of what today is commonly referred to as ETFs. This move will benefit investors and all companies in the space. Here’s why…

Today the word ETF is like Kleenex or Xerox. It covers such a wide base of products that it is losing a definitive meaning. For ETFs to prosper in the future, a clear and dependable meaning has to be associated with the product. Characteristics like low fees, transparency and ease of use have all traditionally been associated with ETFs but are increasingly being questioned as new underlying structures that technically qualify as ETFs are launched. This is not good for the ETF vehicle as it creates investor confusion and often disappointment. Thus a new set of standards should be developed to qualify for the ETF label and another set should be developed for what constitutes an ETP or other variations.

Some in the ETF industry are publicly adamant against seeing their products be pushed out of the ETF tent fearing their new label will decrease interest or sales. In reality, the future ETP crowd knows that their success has been primarily due to their unique offerings…not driven by the ETF name. ETPs unique value proposition going forward will still resonate with appropriate investors — and may be highlighted even further — as they provide access to asset classes and strategies that ETFs cannot. Granted, the ETP crowd might love to be grandfathered into the ETF name today (no one likes change) but in the long run it will be a healthy sister industry with a clearer value proposition.

Using the ETP naming convention isn’t exactly a new idea. In Europe the ETP name is commonly used in the marketplace and the most widely used ETF/ETP research in the world, Blackrock’s ETF Landscape, has been dividing ETFs and ETPs for years.

Improved naming conventions in the ETF/ETP/ETN space benefit investors immediately and all sponsors in the long run. The industry has always used transparency and efficiency as hallmarks and a move to make today’s ETF universe more efficiently navigated through transparency in naming conventions will benefit all parties.