RIP ETF

The abbreviation ETF stands for exchange-traded fund. It used to mean a basket of equities making up some broad index where the annual fees charged were very low. As investors came to understand that ETFs were good, the name “ETF” began to be used for just about any type of investment.

At first it was very narrowly-focused exchange-traded funds that got in on the ETF name. It’s hard to argue that this was really an abuse of the name, though, because these funds were, in fact, exchange-traded. But they were different from the original ETFs in important ways. Firstly, they had higher fees, and secondly, they did not represent a broad index (as Preet observed recently).

For a while I tried to use the cumbersome term “low-cost broad-index ETF” to get at the original meaning of ETF, but that’s not a very catchy name.

Lately, the name ETF has been attached to index mutual funds as well. Because mutual funds aren’t exchange-traded, this is hard to justify other than with the we-will-make-more-money-using-this-misleading-name justification. As long as the general public thinks ETF=good, we can expect the use of “ETF” to expand further to apply to ever more expensive investments.

I’m officially declaring the name “ETF” dead for having any specific useful meaning. To be precise, you’ll have to use some long list of qualifiers along with “ETF” to avoid its various marketing uses.