Closet trackers v. ETFs: go compare – if you can

elephant in the room

Yesterday’s news that the FCA found strategy descriptions lacking in a handful of closet tracker funds is hardly a great surprise. Few managers would admit they charge full-on active rates for doing very little real work.

We’re all for highlighting the closet tracker issue, but have we all missed a trick here?

It’s not that closet trackers exist that’s the problem – it isn’t illegal to charge a lot and deliver so little, after all. But it’s the fact that it’s just so difficult to find and access suitable replacements that hurts good advice, selection and the end investor.

Shhhh, you know who

Like the European Securities and Markets Authority before it, the FCA thematic review hasn’t named and shamed the closet cases.

If they won’t, I won’t either – not yet.

My cowardliness aside, the offenders should be fairly easy to spot. After all, some of them are huge. Many are brazen too; the word “tracker” in their titles is often a giveaway.

By rights, the arrival of the low cost ETF should have whacked these closet dinosaurs years ago. And in the lower-for-longer world, the compounding fee-drag issue should have wiped them out entirely.

Clearly, finding the elephant (or dinosaur) in the room is easy; doing something about it is something else. But why?

Find and replace

I’d wager there is an obvious reason – and one the FCA (and ESMA in Paris) might like to ponder: it’s near impossible to compare right across the fund spectrum.

Yes, there are tools to compare active and closet tracker funds. Other tools screen ETFs. But tools to compare active and closet funds with matching ETFs, showing relative performance and cost savings in a comprehensive manner, are few and far between.

Platform access to the whole suite needs beefing up too. ‘Find and replace’ should be easier than it is. If not, client suitability will suffer.

Of course, I’m not arguing that low cost is always best. There are many different reasons for choosing one fund over another – sector, style, portfolio overlaps, as well as price.

And I love a good active fund as much as anyone should love a well-performing investment vehicle. But when all things are equal, an ETF is often better than a fund and one ETF may be more appropriate than another. Yet if you can’t check, you and your client will never know.

I think the situation will get worse, not better, when real robo-advice begins to take off. Who knows whether those fintech algorithms will really be scanning the whole market to create the right, personalised mix of active and passive for you?

The regulators have made a good start, we need the tools to finish the job.

Guess what? Access to tools comparing active, tracker, closet funds and ETFs is available today! We’ve got it. Look around our website here.