One of the main benefits of exchange traded fund (ETF) investing is transparency, among other things.

Matthew Hougan for Index Universe says this is one aspect of ETFs that gets glossed over too quickly.

Getting to heart of the matter, the fact is that mutual fund investors simply do not understand or know what the funds they invest in even holds. The quarterly reports may not even reflect the current holdings. Last month, a socially responsible mutual fund was charged by the Securities and Exchange Commission (SEC) with investing in companies involved with alcohol, gambling and military contracting, reports Ron Lieber for the New York Times.

The incident illustrates a larger point: when it comes to mutual funds, you don’t know what you’re getting.

ETFs have a serious edge here, in that they are transparent – you can see what stock the ETF is holding on a daily basis. Financial advisors and investors love this about ETFs, and it is one of the main reasons they are gravitating toward them more each year.

In the end, it really doesn’t matter if you look at the specifics of an ETF holding, but it does make the ETF company stay true to the guidelines. And it does matter at the beginning of investing time, because this tells exactly what you are investing in, rather than trusting the title of the ETF. Being able to see what the chef is cooking goes a long way toward inspiring investor confidence.

Tags: Mutual Funds