ETF Industry’s Tower Of Babel

“Think like a wise man but communicate in the language of the people.”
                                                                      
—William Butler Yeats

When I was first interviewed in 2011 for a job at what was then IndexUniverse.com, now ETF.com, I was struck by the alphabet soup of headlines that seemed to flood the site and every other ETF website I was researching.

Sure, “ETF” is going to be necessary and ubiquitous on an ETF website, but that was the tip of the acronymical iceberg headed my way. There was a bevy of other acronyms sprinkled about as if they were common knowledge: ETN, AP (not the Associated Press), ER, AUM, EM, NAV, ‘SPY,’ ‘GLD.’ I never saw these used in more than 20 years covering business and finance in the newspaper world.

Alphabet soup headlines are like code—you know it or you don’t. Letters don’t convey meaning.

Jumping into a deeper end of the financial journalism pool, I expected to be met by words I needed to learn: alpha, beta, backwardation, contango, collars, etc., all of which had concrete and logical meaning connected to them. But all these acronyms … not so much.

Oxymoronic Beta

Soon I also started noticing nonsensical terms such as “smart beta.” I had just gotten my head wrapped around that alpha and beta in the financial world did not mean the first two letters of the Greek alphabet, but rather two distinct investing philosophies. So, if beta was passive marketlike risk, how does it get smarter?

Why not call it passive and active investing? People understand that.

At the end of the day, I figured out that “smart beta” was just simple factor investing, which I knew about, but it didn’t seem so passive to me, other than an index germinated from very nonpassive seeds.

This semantic sparring has endless rounds and new entrants every year in the ETF industry. Usually, to me, new words and phrases sound like marketing creations, or shorthand for lazy headline writers—none of which clearly conveys an accurate meaning.

The ETF industry continuously cranks out new terms and acronyms that poorly convey or mislabel what at the root is usually real financial wisdom. It’s just not spoken in the “language of the people.” And that’s a shame.

Inside ETF Baseball pundits and ETF industry experts accept this disconnect. Once the bad acronym or terms gets disseminated, the feeling is that “we’re stuck with it,” “that ship has sailed” and “everyone knows what it means.” That’s the typical what-else-do-we-call-it retort. Another case in point is “ESG” [environmental, social and governance] ETFs. Ask your neighbor what ESG investing is, and expect a blank stare. 

And then lo and behold, that carefully researched and backtested investment thesis using newfangled terms and acronyms to describe itself stumbles out of the gate and never gains traction.

‘ANT’: The Newest Pest

The newest case in point is egregious on two levels: a mislabel and a new acronym that has crept into the ETF lexicon to add confusion.

Over the past few weeks, we’ve seen a new type of active ETF come to market, one that discloses holdings on a longer period—quarterly—instead of the daily disclosure we’re used to in the ETF space. (Read: New Kind Of Active Debuts)

“Active nontransparent ETFs,” or ANTs (active non-transparent), as the acronym gremlins have concocted, packs all these problems into one nice example of thinking like a wise man, but tripping over using the language of the people.

These new types of active ETFs are transparent, but they don’t disclose as regularly as other active ETFs do. Nontransparent is incorrect by definition. These are not opaque, never-know-what-you’re-holding-types of investment vehicles. These are simply active ETFs. The transparency is hugely important, of course, and that’s the job of the investor and financial advisor to understand.

But to introduce new phrases and acronyms with new investment vehicles is a steep hill to climb if the goal is to make an immediate connection, and sale, with an investor.  

Drew Voros can be reached at dvoros@etf.com

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