Better labelling of ETPs is long overdue

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Ben Johnson, Morningstar

Morningstar’s Director of Global ETF Research, Ben Johnson, agree with the spirit of an industry coalition proposal to improve the labelling of ETPs, but not the specifics…

Better labelling for ETPs is long overdue and would help investors more confidently navigate the menu of more than 2,300 ETPs.

There are two buckets of ETPs, the first bucket contains ETFs, and the second contains exchange-traded notes (ETNs) which are not funds, but in effect are IOUs written by banks, as the issuing bank promises to deliver the return of an index to investors in exchange for a fee. 

I believe that the SEC needs to own any decision relevant to ETP labelling as further fragmenting the already disjointed and overlapping mosaic of regulations that governs the ETP ecosystem will not be good for anyone.

The rise of thematic and “gimmick” ETFs: Investors have naturally wondered if these products have been performing well in the midst of the current downturn.

When investing in thematic ETFs, it is important for investors to realise that they are essentially placing a trifecta bet at the horse track as they must bet right on the ETF’s theme being durable, there is adequate amount of stocks to fit the theme, and most importantly the valuation is correct. 

I also liken ETF developers to chefs throwing things against the wall to see what sticks when they develop new products. It’s important for investors to weed out the good from the bad when it comes to themed and “gimmick” ETFs.

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