Part of the reason the ETF industry hasn’t taken on mutual funds directly, Jim, is because they can’t.

Specifically, FINRA—the Financial Industry Regulatory Authority—does not allow companies to make direct comparisons between ETFs and mutual funds in their marketing materials. You can use a mutual fund to explain how an ETF works—”an ETF is a hybrid of stocks and mutual funds,” for instance—but you can’t say why one is better than another. In other words, you can’t say:

• That ETFs are generally much more tax efficient than mutual funds.
• That ETFs are generally less expensive than mutual funds.
• That ETFs are always more transparent than mutual funds.

I’m sure there are “good” reasons for disallowing direct comparisons. It is probably easy for marketers to distort the differences to make one product look better than the other. (Heck, I did that in the paragraph above by not mentioning the downsides of ETFs: commissions, spreads, premiums/discounts, etc.)

But FINRA has thrown the baby out with the bathwater by disallowing comparisons altogether. Surely we could find a way that is fair but still allows for frank discussion. We’re all adults here. As it stands now, investors are just left in the dark.

It’s Not Just FINRA

While I’m on my soapbox, let’s bring up another pet peeve: prospectuses. I spend a frightening portion of my life reading through prospectuses, and they are almost all impenetrable. Key information like what stocks a fund might own or how shareholders get taxed are couched in legalese that would make Alan Greenspan’s head spin.

I know the SEC is pushing through regulations to create a “summary prospectus”—a three- or four-page mini-prospectus that would give investors the core information they want, like returns, top ten holdings, etc. In theory, these will be written in “plain English.”

But I have my doubts. Fund companies are so hamstrung by the fear of being sued that they are afraid to say anything at all.

Last 5 posts by Matt Hougan

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