As regulators aim for the naming sense of socially responsible investment strategies, some exchange traded fund bystanders could be unintended casualties in the fight.
The Securities and Exchange Commission is working on a new Names Rule change that was triggered by a wave of environmental, social, and governance fund products to make sure that investment funds are doing exactly what their products are named for, potentially weeding out so-called greenwashing in the ESG space or fund managers just tagging on the ESG appellation to capture the hype for sustainable investing.
However, the new rule would require that all ETFs would have 80% of holdings reflect their namesake, which could have the unintended consequence of putting thematic ETFs like the “MAGA,” “Vice,” and “BAD” ETF strategies under the microscope, the Financial Times reports.
“The names of these ETFs are designed in part to trigger investors to use them as pushback against the wave of ESG ETF products,” Todd Rosenbluth, head of research at VettaFi, told the Financial Times. “However, the securities inside do not necessarily match up with the name and could result in shifts to the portfolio to meet the SEC standards.”
Anti-ESG and sin funds “will need to take a very hard look at their 80 percent rules and decide for themselves if they believe they’re in the clear”, Dave Nadig, financial futurist at VettaFi, told the Financial Times. “Some clearly are fine; some will have some tweaking to do.”
The rule could require funds to more accurately define in their prospectus sheets the key terms that fall under their names, but the definitions can not diverge too drastically from plain English or industry standards.
Furthermore, the later 20% of the fund portfolio can not directly contradict the name of the investment fund. For instance, something like a “fossil-fuel free” investment strategy can’t include crude oil producers.
“The rule is really about, does the name and the prospectus reflect the holdings?” Andrew Behar, chief executive of As You Sow, a shareholder non-profit advocacy group, told the Financial Times.
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