The Name Game

December 01, 2009

Ticker symbols and fund names shouldn’t matter, but I suspect they do. A lot.

I’ve been thinking about this recently because I’ve been thinking a lot about ETF liquidity. As much as we’d like to imagine a world of buy-and-hold investors, the reality is that ETFs are traded. Before the ETF, pooled exposure was essentially available only to buy-and-hold investors, through mutual funds. Those mutual funds didn’t go away. So it stands to reason (and the numbers definitely back this up) that ETFs attract a lot of hot money.

The funny thing is, buy-and-hold ETF investors care quite a bit about traders. The No. 1 most-asked question about individual ETFs we get is, “how does it trade?”. That’s because smart investors and advisers know that ETFs are really only a better mousetrap when the ETF is itself relatively liquid. That liquidity is in part what keeps spreads tight, and the price of the ETF being near the net asset value of the underlying securities. (It also is what drives the tax efficiency of ETFs, at least indirectly.)

And all that has me thinking about ETF tickers.

Traders, you see, are one of the most superstitious and routine-bound group of people you’ll ever met. If they did something one time and it worked, they’ll do it again and again and again.

This is why SPY will always be more liquid than IVV, despite IVV having substantial benefits over “The Spiders.” Because when a trader has a hunch, or needs to gain or lose exposure in a hurry, SPY will be the three letters already in his head. And let’s be honest: For a day or two, the difference between the two will be meaningless.

It’s why SLV and GLD will continue to dominate the market for bullion. If I want gold, GLD seems simple. It’s been around, and its ticker is obvious. Ditto SLV, despite the fact that it’s 10 basis points more expensive than its identical competitor, SIVR.

You want agricultural exposure because you think soybeans are going up? Are you going to remember MOO (the Van Eck Market Vectors Agribusiness ETF) or JJG (the iPath Dow Jones AIG-Grains ETN)?

The buy-and-hold investor who takes half an hour to dig around will buy the grain ETN every time. The trader with a hunch? It’s MOO all the way.

Is this silly? Yes. And of course, a cute ticker symbol isn’t going to guarantee anyone assets. I don’t see PBJ (PowerShares Dynamic Food & Beverage ETF) or FAN (First Trust Global Wind Energy ETF) scooping up mad assets out of all proportion to their competitors.

But I think reality is that traders trust ETF labels. The ETF industry has done a commendable job showing that for the most part, what you see is what you get with an ETF. That’s a good thing. And it means if

State Street

or iShares or Vanguard came out with a fund called the “Space Exploration ETF” and tickered it “MOON,” traders and investors both would expect it to be investing in NASA suppliers and Virgin Galactic. Many, many people would simply trust the label, and never open the prospectus.

And this, ultimately, is the problem with the iPath ETN+ inverse and leveraged products.

Matt, you may think they’re a better mousetrap. Heck, I actually agree with you. But because neither the tickers nor the fund names tell me anything useful about the actual notes, they’re destined for obscurity.



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