When it comes to your first engagement with a product or service, a name has a big impact.
And, for an intangible product like an exchange traded fund (ETF), a name is particularly important. It has to convey a brand, a strategy, and be somehow recognisable amongst a sea of other investment options.
Generally, ETFs have short names of around four to eight words, but as ETFs get more complex, their names are getting longer.
For example, VanEck will soon launch the VanEck Morningstar World ex Australia Wide Moat ETF (GOAT). Try saying that one quickly.
Of the 200+ listed ETFs on the ASX, 92% of ETFs are between 4 to 8 words.
Different factors, like the type of product/investment strategy, will affect the length of an ETF name. (eg. active ETFs describe themselves as a ‘Managed Fund’ and hedge funds use ‘Hedge Fund’).
All of this got us thinking: when you’re considering which ETFs to buy, does a shorter, simpler ETF name correlate with higher popularity, lower costs and better performance?
Read on to find out.
How are ETFs named?
Firstly, let’s cover the ETF naming convention. Given many investors don’t read the product disclosure statement (PDS), an ETF name needs to convey all pertinent information.
ETF names can be broken down into the following components:
- Issuer name: this is the ETF provider (e.g. Vanguard, iShares, BetaShares).
- Index name: ETFs that track a benchmark are sometimes required to use the name of the underlying index provider (e.g. FTSE, MSCI, S&P).
- Exposure: this gives clients an idea of the exposure of the investment (e.g. property, bonds etc.).
- Regulatory info, share class detail, currency: eg. ASIC requirements to ensure consumer protection.
For example: Vanguard MSCI Index International Shares (Hedged) ETF broken down to its constituent parts is:
Vanguard [Issuer Name]
MSCI Index [Index Name]
International Shares [Exposure]
(Hedged) ETF [Regulatory info, share class detail, currency]
Australian ETFs: what’s in a name?
ETFs with shorter names perform better
We assessed both average and median returns of Australian ETFs, and there’s no denying that those with shorter names have generally performed better by a significant margin. Those with names under four words are dominated by the ETF Securities precious metals range (such as gold, palladium and silver) which have all done exceptionally well over the last three years.
Our charts below show there’s a clear pattern that longer names mean worse returns.
ETFs with longer names charge higher fees
Australian ETFs with longer names have higher fees. Every extra word seems to add eight basis points (0.08% p.a.). What this suggests is that a longer ETF name relates to active management, use of derivatives, leveraging, or hedging – all of which all add layers of complexity, and thus, higher fees.
ETFs with shorter names attract more money
Australian ETFs with shorter names seem to attract more money from investors. In fact, ETFs with more than eight words have only been able to attract $78 million on average, with half of the market’s money in ETFs with lower than six words.
It appears that simplicity matters when it comes to attracting investors, with ETFs with shorter names having higher assets under management (AUM) in relation to the size of the ETF.
Examples of ETFs with long and short names
Long ETF names:
|ASX Code||ETF Name||Number of words|
|BBUS||BetaShares US Equities Strong Bear Currency Hedged (Hedge Fund)||9|
|GLIN||AMP Capital Global Infrastructure Securities Fund (Unhedged) (Managed Fund)||9|
|QHAL||VanEck Vectors MSCI World Ex-Australia Quality (Hedged) ETF||8|
Short ETF names:
|ASX Code||ETF Name||Number of words|
|GOLD||ETFS Physical Gold||3|
|NDQ||BetaShares NASDAQ 100 ETF||4|
|VAS||Vanguard Australian Shares Index ETF||5|
The ETFs in Stockspot Portfolios
The ETFs in the Stockspot Model Portfolios all have names less than six words. While we didn’t set out to select ETFs with short names, we were deliberate about choosing simple index ETFs, and it seems these simple ETFs tend to have lower fees, track better known indices and have performed better.
It might be a boring strategy, but the most boring strategies are often the most brilliant.