It would be easy to read the story we broke Monday about the seemingly un-amicable breakup of PureFunds and ETF Managers Group (ETFMG) and simply say, “Well, that’s interesting,” make some popcorn, put your feet up and watch.
However, the story brings to light so many interesting things about ETFs (and really all mutual funds) that I can’t help but use it as an opportunity to dig deeper.
Before I dive in, I should point out that I have no horse in this race. I know about as much about the specifics here in this particular case as you do, if you’ve read the article. The facts here are pretty straightforward for my purposes: a marketing relationship between the sponsor and marketing agent (PureShares LLC) of a 1940 Act Trust (whose shares used to trade under the brand “PureFunds”) was terminated by the advisor of that trust (ETF Managers Group LLC).
That sounds like a lot of mumbo-jumbo, honestly, so let’s abstract this for a minute. Who the heck are all these people, and what the heck do they do? The answer—like everything related to ETFs—is a bit more complex than it seems on the surface.
The Fund Itself
Let’s start with the fund itself (you can think of “fund” and “director” as generic, although technically most funds are “trusts” and are overseen by “trustees”). The vast majority of ETFs are organized as plain old mutual funds, registered under the Investment Company Act of 1940.
That act, which is long and mostly boring, sets forward a brand new kind of entity—the investment company—which, as long as it follows certain rules, allows you and me and everyone else to pool their money together for a common investment objective. That’s a good thing—it’s what brought us the mutual fund, and in turn, the ETF.
The most important part of the idea of an investment company is that it’s owned by its shareholders. Every individual who owns a share of an ETF or mutual fund has a direct ownership stake in all of the assets of the fund, and a vote in how that fund is managed, much like a corporate shareholder.
If you don’t like how a fund is being managed, you can call the board of directors of the fund, and if you rally enough shareholders, you can get the directors to fire the investment manager, or pretty much anything else you like.