[This article appears in our January 2018 issue of ETFR Report.]
Some commonly accepted terms associated with ETFs can be a real turnoff.
Twenty-five years is a long time. Not only is it how long ETFs have been around, it’s how long I’ve been trying to explain ETFs to advisors, investors and people at cocktail parties.
I’d like to say that a lot has changed, and objectively, plenty has. With over 2,000 ETFs and trillions of dollars in assets, ETFs have indeed morphed from a clever little liquidity vehicle into a dominant investing paradigm. You can now buy virtually any asset in the world through some sort of exchange-traded wrapper, in almost any market.
And yet, I’m still trying to explain to everyday people what exactly an ETF is, and why they should care.
I recently hosted a webinar with PowerShares by Invesco in which they presented some pretty stunning research. It turns out that when you talk to regular, normal people, they don’t like a lot of the words we use all the time to describe ETFs. Take the word “transparency,” for example. To me—a self-professed indexing nerd—that sounds like an awesome thing! But to an average person, it turns out that word has been co-opted by decades of politicians and untrusted corporations. Saying something is “transparent” now turns many people off.
Or the word “passive.” We talk about passive investing versus active investing all the time, but for most investors, they’re somewhat meaningless distinctions. Do you want to be a sheep? Or do you want to be a day trader? That’s how most investors see the distinction. Even the words “low cost” can backfire. After all, how many times have we been told “you get what you pay for.”
It’s not that these things aren’t appreciated—just look at the nearly $500 billion that flowed into ETFs in 2018. It’s that we, as ETF insiders, need to refocus these casual conversations back to the true benefits for investors in terms that connect more directly.
Instead of talking about how cheap ETFs are, we can talk about their efficiency—more investor money gets put to work, and you only pay for your own trading activity. And thanks to ETFs’ tax advantages, you get to keep more of your money working for you.
Instead of talking about transparency, talk about how it’s nice to know how much Apple you have when earnings season rolls around. Talk about how nice it is to go to the website and check how much oil is in your commodities fund today.
Instead of talking about passive investing and the joys of indexing, talk about how the past 30 years have shown us over and over again how hard it is for most managers to actually pick stocks, but luckily, we have good ways of putting stocks in logical baskets and making efficient portfolios. If the investor wants a niche product or a professional manager making decisions, they can get that too.
And last but not least–don’t be afraid to learn things you already know. After 25 years, I still get a nuance almost every time I read an “ETF 101” article or hear a new product pitch. The more I listen, the better I find I get at being an advocate.