When it comes to the returns that an exchange traded fund (ETF) is providing, does a percentage point or so get lost in a performance analysis fog?
Time after time, the numbers that are reported by ETF providers are not the same as the returns that the financial advisor is getting form the brokerage firm when they go to purchase the funds, reports David Hoffman for Investment News. In the long-term, this can mean backlash for the industry’s reputation at large.
There are many advisors who make an argument that by using ETFs, they are able to save a percentage point a year, plus or minus half a percentage point. If the half point to one and half point is lost in a performance analysis fog, then are we losing the value of ETFs?
Some discrepancies are because of the way brokerages handle ETFs: performance reported by providers incorporates dividend distributions, which must be reinvested by the broker through which the ETF was purchased. The time at which the broker makes the reinvestment may differ from the time at which the asset manager assumes they’ll be made.
This could be the reason for the difference in market price returns, which is what is actually earned by ETF investors. Much of the confusion lies in the definition of the closing price. Some advisors use the midpoint of the national best bid/ask as of 4 p.m., while others use the last trade of the day, which can be as late as 8 p.m.
As of right now, ETF providers are adamant that the returns reported are accurate. Until a standard calculation method is introduced, there are many assumptions that an advisor is making and must confirm them with their broker.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.