In recent years, certain mutual funds and exchange-traded funds (ETFs) have labeled themselves as "green energy"—when in fact they included a preponderance of fossil fuel companies among their holdings.
In response, the U.S. Securities and Exchange Commission (SEC) has amended its Names Rule, which mandates that funds whose names mention specific investments, industries, or geographies invest at least 80% of their assets in such holdings. The newly broadened rule now also applies to investing themes, such as clean energy and robotics, as well as particular investment characteristics, such as growth and value.
"Prior to the rule change, these types of funds didn't have any restrictions on what they owned," says Michael Iachini, CFA®, CFP®, head of manager research at the Schwab Center for Financial Research. "Now, they'll need to meet the investment requirements that many other funds have followed for decades, providing greater transparency for investors."
Fund groups with net assets of $1 billion or more have until November 2025 to comply with the new rule, while those with less than $1 billion in assets have until May 2026. Once in compliance, funds must review their holdings quarterly and correct any identified issues—for example, if investment performance has caused their allocations to drift—within 90 days.
"Despite the increased protections, investors should still do their homework when researching mutual funds or ETFs," Michael says. "The fund's name may help you winnow your list of prospective investments, but it's important to ensure the fund's holdings align with your expectations, goals, and overall portfolio mix."
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