ProShares, Direxion Are NOT ETFs
June 15, 2009
For all of his knowledge of exchange-traded products, Hougan still can’t get it right.
It is almost farcical to me, Matt, that for all of your knowledge of the ETP industry, you still can’t get your terminology right. And the net result is that, while you portray yourself as being part of the solution for the problems in the industry, you are actually part of the problem.
Nothing you talked about in your blog is an “ETF.” Nothing. Leveraged products, futures-based products, USL, USO, all the Direxion and ProShares and some of the Rydex products, and even the iPath products … none of them are really “funds” and certainly not one of them would I classify as an ETF. These are all, to me, as I’ve repeatedly said in public and in my blog, exchange-traded products or notes or perhaps even structured products. And it’s high time we stopped calling them ETFs.
Because, as I pointed out in my “ETFs Are A Scam?” blog from a couple of days ago, many investors are confusing these products with ETFs, and without question, the broader exchange-traded products, including the real ETFs, are being tainted as a result.
So, Matt, I’ve got a solution even more simple than bringing down the SEC’s hammer on all of those products that are already out the door: stop calling them ETFs. Right now, let’s end the branding blur and reclassify any of the products that are not down the middle (“down the middle” to me means funds that hold actual securities and attempt to replicate a diversified index, and that are ideally regulated investment companies complying with 40 Act diversification requirements). There are few ETPs that will be punished by this reclassification. Even GLD and IAU, for example, which are relatively straightforward products tracking spot gold, have their quirks, including tax treatment as “collectibles” and not funds.
So let’s start there, right here. I would support calling them structured products. Does anyone disagree with me on that? Send in your comments. To me, even ETPs has too close a ring to ETFs. And on the other issue of raising the bar and regulating them to a degree like options, I am open to that discussion. The constant drumbeat of investor discontent with these products (which as we’ve pointed out is more due to investor misunderstanding than bad products) convinces me that we need to do something to save investors from themselves.
And, as a side note, Mr. Bogle’s coming broadside at the ETP industry is much more about actual ETFs than all of the exotic products on the market. I know that from my conversation with Mr. Bogle yesterday afternoon, in preparation for our webinar and Journal of Indexes editorial board meeting. Mr. Bogle has done some intensive research that shows that ETF investors have an even stronger tendency to trade their way into losing to the market, and to an even greater degree than active mutual fund investors.
Mr. Bogle is in effect saying that guns do kill people and that ETFs should perhaps be locked away safely in a cabinet and not employed in retail investor portfolios. And that, my friends, is an entirely different discussion, and one you won’t want to miss, as it plays out tomorrow in front of all of the senior leaders of the index, ETF and structured products industry.