Easy for them to say – go to a plain-English expert for jargon be gone
The First Trust Mega Cap AlphaDex Fund (NYSEArca: FMK) is based on the Defined Mega Cap Index, a modified equal-dollar-weighted index designed by S&P to identify and select stocks from the S&P BMI US Index that may generate positive alpha relative to traditional passive-style indexes.
That excerpt is from Investment News Index Universe, a trade publication. Is it a mistake? Probably not, although it’s hard to tell. Is it useful? Hardly.
For the general business press, this sort of language is offensive and unacceptable. Even for readers well-versed in the jargon of exchange-traded funds (ETF), this one is difficult to understand. I admit but am not ashamed that I don’t get it. Reporters who are not market specialists are likely to use such language because they don’t understand it either. (They also may describe the ETF as one of those “complex financial instruments known as derivatives,” although there is debate about whether ETFs are derivatives at all.)
In this case, going to the source is not helpful. The First Trust website describes the ETF in pretty much the same language. Institutional investors, who are members of the club, no doubt know what First Trust is talking about. “Retail investors” – the real people who might read about these exotic financial products and think about buying into them – most likely will be flummoxed.
The definition of an ETF can be found in financial-terms dictionaries, such as “The Financial Writer’s Stylebook,” by Chris Roush and Bill Cloud:
“An investment that trades on an exchange. The value of the fund is based on the assets it holds, such as stocks or bonds. Many exchange-traded funds track an index, such as the Standard & Poor’s 500.”
That’s a start, but it doesn’t decipher the passage above. It’s time to consult an expert – but not one who uses the same cryptic language as the companies and trade papers. Take some time and draw up a roster of people to call when you need a plain-English explanation.
I called Russell Wild, an investment adviser and author of several books on personal finance such as “Exchange-Traded Funds for Dummies,” and asked him to translate the troublesome sentence about the First Trust Mega Cap AlphaDex Fund. He obliged:
We pick a bunch of huge companies that we think are going to perform better than other huge companies, and we plunk our dollars into these companies based on how well we think each company is going to perform, and when it all comes out of the wash, we trust that the performance of this fund will clean the market’s clock.
Too flip? Not for us. It’s easy to understand, and it comes from a real expert.
(This posting was changed to correct the name of the source mentioned in the first paragraph. It was Index Universe, not Investment News.)
