Peter Sleep: Busting the ETF jargon

From fees to tracking error to “two-way flows”, unsuspecting investors can be caught off guard by some of the inside language used by the ETF industry.

Challenging the naysayers on high yield ETFs

There are a number of ETF education pieces and I think most of us now understand what a (physical) ETF is, we know that ‘roll cost’ is nothing to do with Pret A Manger and similarly that synthetic replication is nothing to do with Dolly the sheep. Still, I thought it would be useful to pass on some of the experience I have gathered over the years in dealing with ETFs, especially since ETF specialists can have their own unique lexicon.

  • There has been lots of interest in that ETF

If an ETF person says to you “there has been lots of interest in that ETF”, what he or she actually means is that the ETF in question has not been a success. Insofar as there has been any interest, it has possibly come from the authorised participants asking for their seed money back.

  • Two-way flow

Another piece of jargon that you may hear is that there has been a lot of “two-way flow” in a particular fund. Here, what your interlocutor means is that there have been large scale redemptions. It is probably worth your while to immediately check the size of the fund in question – it is probably a lot smaller than you thought.

  • Lots of activity

You may also hear that there has been lots of activity in an ETF, implying it is very liquid. But again this is almost certainly a euphemism for ‘a lot of redemptions’. Again, go to the ETF providers’ website and just double check the size of the assets.

  • Tracking differences

Another firm favourite, particularly in passive fund land, is to blame large tracking differences on the different cut off times of the fund and the underlying market. I have never really understood why anyone would want to suggest this, as surely these differences would net out – but it keeps coming up. I once had this mentioned to me when in fact the wrong benchmark had been presented. That did not stop an instant reflex to lapse into jargon.

  • Fees

The subject of fees applies not only to ETFs but to all investment products. In my experience, across the decades, this is an area where we are most divided by a seemingly common language. The question on fees almost always brings a partial answer that requires careful follow up. A case in point was I was recently told that a firm could create a UK ETF for free. I found that ‘free’ actually meant zero plus 0.5% stamp duty. Always consult a good dictionary to avoid disappointment.

Another term that seems to lead to misunderstandings is the term “all-in” fee.  Maybe it is a translated into another language first, and lost a little bit of its meaning when translated back into English, but I usually find that it is this term that prompts me most to open the fund prospectus.

  • On your toes

Every industry has its own jargon and we all perhaps unwittingly lapse into jargon all too easily. My colleague, Justin Urquhart Steward, calls it “bullshit bingo” and he is very effective in calling it out and dealing with it kindly. Alas, we do not all have Justin’s skills and we all need to be on our toes.

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