Will new ETF classifications muddy the waters?

Deborah Fuhr Welcome to ETF TV, I’m Deborah Fuhr from ETF TV and ETFGI. Today, we’re going to be discussing ETF, ETP classifications and does it matter? With me today, I have Bruce Bond, one of the founders of PowerShares and Innovator ETFs, and Steve Cohen, who has been with ProShares for just over 18 years.

So we know over the years there’s been a number of efforts to think about reclassifying products into different buckets. Back on May 13th, we saw the coalition put out a paper trying to clarify what they see as the way products should be pocketed. Would one of you be able to just tell us at a high level what the proposal is?

Steve Cohen The basics are to create some kind of shorthand that distinguishes an ETF from other types of exchange traded products. ETNs is another category. There is exchange traded instruments, which is got a number of different kinds of products in it, and then there’s exchange traded commodities.

Deborah Fuhr And Bruce, I know that you put out a note commenting on your thoughts about the proposed classifications. Maybe you can share with us your thoughts.

Bruce Bond You know, the new generic rule put out by the SEC called 6c-11, basically provides for what an ETF is. You know, anything that can go onto that is an ETF. And I would even throw inversed and leveraged funds into that same thing. And I don’t know that within the mutual fund industry, they ever decided to say, fx, when index funds came in, you never saw the mutual fund industry say, ‘you’re not a mutual fund, you’re an index fund. Therefore, you can’t call yourself a mutual fund.’ And that’s really what’s happening here. You have a few people at the top, who have the most assets, who have decided that they’re going to determine who can call themselves an ETF and who can’t call themselves an ETF. And it’s a much bigger pond than just them, and I know that they want to make this decision. But really, historically, products are categorized or known as what they are by how they’re organized, not by how people feel about them. And I think it’s discriminatory personally to decide that, well, we don’t like you because of the type of securities you own, therefore, we’re not going to let you call yourself those. They’re organized as ETFs, especially under 6c-11. I mean, they are ETFs. That’s what they are.

Steve Cohen Yeah, I do think you have to go back to the objective, and what are we trying to solve for? In my mind, we have a long way to go as an industry to make sure that investors understand what they’re buying before they buy it. Think about it; beyond ETFs we’ve got thousands of individual securities. And is there a system, if you think about the end game, that could categorize mutual funds in a way that would actually be helpful to investors? If there were, we probably would have done it after all this time.

Bruce Bond I can understand for a need for classification under the ETF umbrella so people can help decipher the different types of products. But I think Morningstar and these other providers do that and there’s no need for something up above that. And underneath that, categorize away, you know, everybody’s going to have their own opinion about how they should be categorized.

Deborah Fuhr I find it interesting that the consortium has gone to the exchanges to ask them to make changes, because my understanding is if they were to change their listing rules, which is a whole other can acronyms we could start throwing out there, which I don’t think will help people to understand what to invest in. They would have to change the regulations in their listing guidelines through the SEC, so it seems that this is an interesting way for them to go about trying to implement the change. Would you agree with that?

Bruce Bond I think it’s a very interesting way for them to go, and I think they tried to go the SEC route since they had no traction in these other places that they’ve tried, so they went to a place where I think they have some economic leverage on the exchanges, to pressure them to make these changes. And that’s why it’s sad to see and a big mistake.

Deborah Fuhr Do you think it’s likely that we’ll end up with some type of working group with ICI and the broader constituents thinking about how to help people better understand the products?

Steve Cohen Look, I hope that in the end we pool our resources as an industry to help people understand that there are no shortcuts. There’s no substitute for actually reading the label and understanding what’s inside the product. We don’t want to create more confusion in this industry, and this proposal potentially creates more confusion. And even worse, a false sense of security that anything labeled ETF is going to be safe and I don’t have to do much more homework on it, whereas a fund investing in copper mining companies or Chinese real estate companies would be called an ETF, despite the risk and complexity of those types of investments. So there are no easy answers here. And I do hope that it can spur broader conversations to create some meaningful change so that it’s not just a debate among industry participants about the under-the-hood nuances of structure of products, which is something that I think will go way over investors’ heads.

Deborah Fuhr Thank you Bruce and Steve, for joining us today. It’s been terrific.

Steve Cohen Thank you.

Bruce Bond Thank you for having me.

Deborah Fuhr I’d like to thank Bruce and Steve for their insights today. And I’d like to thank you for watching. If you’d like to see further episodes, please go to ETFTV.NET, thank you.

Published on July 2, 2020