Mary Ann Bartels knew there’d be pushback.
“We’re like Einstein,” she nervously joked to a colleague at Bank of America Corp. in the months before they unveiled their latest research, alluding to the deeply skeptical reaction that greeted the Nobel Prize-winning scientist’s theory of relativity. Bartels thought her analysis was spot-on. But still, she was steeling herself for some serious criticism.
What was bothering Bartels? Well, Bank of America was about to become the first investment bank to make trading recommendations on the $3.5 trillion of exchange-traded funds in the U.S. A regulatory ban on brokers giving ETFs buy or sell ratings -- the bread and butter of equity research teams -- had been lifted, allowing the bank to recommend funds the way it does stocks. Now Bartels, who was heading the effort, planned to ruffle feathers by doing just that.
Her team is bringing a stock-picker’s sensitivity to ETF scrutiny, using Bank of America’s buy and sell judgments on individual stocks -- compiled by scores of equity analysts covering more than 3,000 companies across 28 global industries -- to choose between funds with similar sounding names and strategies. It’s an almost heretical idea for advocates of passive investing, that benchmark-tracking ETFs aren’t as passive as many think and that there are significant differences in products following the same indexes.
Bartels is itching to show she’s right, even if she makes some enemies along the way.
“You always wonder what’s going to be the feedback,” said Bartels, head of ETF strategy for BofA Merrill Lynch Global Research, which published its first recommendations this month. “To stay fierce and not give up, to persevere and be the first sell-side shop out, it’s exciting.”
Benchmark Engineering
It’s all thanks to Congress, which passed a bill last October requiring that the U.S. Securities and Exchange Commission treat research on ETFs like stocks. Prior to that, it had been considered an offer of securities and therefore was subject to onerous disclosures that made it impractical.
This is a seismic shift. Overnight, investment banks have added a potential revenue stream. Financial advisors and other investors gained a new source of information on increasingly popular products. And the money managers behind the largest funds acquired a new outlet to promote their products -- if they can garner a favorable review.
“With all the slicing and dicing that Wall Street has done in creating all of these products, maybe we should get out of the mindset that it’s just an index and think about it as a portfolio,” Bartels said during an interview at her offices in New York. “The construction of the index is important -- and the construction is stocks -- so we think you have to start looking at stocks again.”