What’s Behind the Mask?

on October 7, 2023

On Halloween, you can expect a collection of ghosts, witches, princesses, and superheroes to come to your door with cries of “Trick or Treat.” Likely, some are neighbors, and you may recognize the parents from next door hiding behind a tree as their kiddos bravely walk up the sidewalk alone. Of course, you aren’t afraid of them—you know them. Even the little kids you don’t know aren’t scary. Freddy Krueger and Michael Myers aren’t walking up your drive.

Commercial haunted houses create more fear, but you still know the monsters are only people in costumes. Your knowledge may not help as axe-wielding killers leap from the shadows, but your screams are mostly in good fun!

But then, there are the news stories about the quiet neighbor or the young person who seemed OK but didn’t quite fit in. Actual serial killers are terrifying because people don’t recognize them. Often, we fear our imaginations but don’t pay enough attention to what surrounds us.

Of course, not all stakes are as high as recognizing a serial killer. However, when things aren’t as they appear, the outcome can be painful, even if not deadly.

For years, I have been irritated at some mutual or exchange-traded funds’ names. They appear to be created by marketing departments, providing no clue about the funds’ strategies or goals. Worse, when investment products have names that suggest characteristics, buyers may be surprised to learn the underlying holdings don’t match expectations.

Just in time for Halloween, the Securities and Exchange Commission passed the “Names Rule” that requires funds to remove their masks. When the rule was announced, Gary Gensler, the SEC chairman, stated, “A fund’s investment portfolio should match a fund’s advertised investment focus.” Although his statement seems absurdly apparent, it isn’t. Intentionally or not, many funds mislead investors about their focus.

ESG funds can be some of the worst offenders when the holdings do not center around environmental, social, or governance issues. Currently, ESG is trendy, and some funds want in on the action without the work.

To help investors quantify the funds’ behavior, the Names Rule now requires that 80% of the fund’s underlying holdings fit its name. So, if a fund markets itself as ESG, 80% of its positions must be tied to investments around that goal. The rule also applies to other investment products, including growth funds and value funds. However, most of the confusion appears to exist around popular issues.

As an investor, the Names Rule can give you confidence in the focus of your investments. Of course, you should always complete due diligence before you make any purchase and be sure that your actions match your goals and fit within your risk tolerance profile. Additionally, a fund can have a legitimate ESG focus that does not tie to YOUR ESG concern. However, the new SEC rule should make it easier for you to sleep at night. After you leave the haunted house, you’ll need all the help you can get!



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