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ETF Panel Gets Heated Over Question of Who Really Runs Your Fund

Too often, investors rely on the wisdom of the crowd.

By Dani Burger

(Bloomberg) --Who runs that ETF you just bought? Take a close look -- it may not be who you think.

Though exchange-traded funds may have well known brands like Vanguard Group or BlackRock Inc.’s iShares in their names, the less spoken reality is that often an indexer created the portfolio and controls it.

This tension surfaced at a conference in Dublin Wednesday, as regulators and providers alike argued over ETF marketing and transparency. During a mid-morning panel, European Investors Association’s Niels Lemmers turned to Vanguard’s Sean Hagerty and posed a pointed question that got to the heart of the matter and triggered squirming in the audience.

“How are we going to have sufficient investor protection that makes sure every retail investor knows that when they buy a Vanguard funds that’s actually taken up by MSCI, they know it’s an MSCI fund and that you are just the marketing arm?” Lemmers asked at the Central Bank of Ireland conference.

As passive indexing has grown, so too has the clout of indexers such as MSCI, FTSE Russell, and S&P Dow Jones Indices. Self-indexing has become an increasingly appealing option for ETF providers, allowing them to retain better brand and cost controls.

To be sure, Hagerty agreed that it’s “important to call a spade a spade” when it comes to advertising ETFs. But the issue is most egregious when marketers describe non-market-capitalization weighted products as using passive strategies, he said, repeating a common Vanguard viewpoint that culminated in the firm creating actively managed smart beta ETFs.

The trouble according to Lemmers is that rather than investigating what’s behind an ETF, investors rely on the wisdom of the crowd, believing that any popular fund is logical and safe. However, this follow-the-leader phenomenon isn’t unique to ETFs and in fact started with mutual funds, said David Abner, head of WisdomTree Investments Inc.’s European operation.

“ I don’t think they’ve ever understood,” he said. “Ask if they understand what happened in Fidelity Magellan. They had no idea.”
To contact the reporter on this story: Dani Burger in London at [email protected] To contact the editors responsible for this story: Samuel Potter at [email protected] Eric J. Weiner, Dave Liedtka

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