The widespread success of exchange traded funds have been in part built upon the high transparency into component holdings. However, some investment managers are irked that the industry hasn’t adopted a standard for transparency as many find inconsistent disclosure practices.
There is a “gap between what fund companies must disclose to market makers and how much actually filters through to the rest of the ETF market,” which “could come back and bite the industry down the line,” Paul Justice, ETF research director at Morningstar, said, reports Murray Coleman in an article posted at MarketWatch.
According to regulatory rules, ETF providers are required to disclose daily holdings to “Authorized Participants,” who create or redeem shares of ETFs on a day-to-day basis in an attempt keep the ETF’s price close to its net asset value. [What is an ETF? — Part 4: In-Kind Creations and Redemptions]
However, the information is not as easily accessible if you are a regular retail investor.
For instance, when comparing two fund providers, Vanguard provides a complete list of holdings and weightings to the general public on a quarterly basis – the mutual fund company follows a more traditional reporting schedule, whereas iShares generates its lists on a daily basis.
“We don’t believe it’s a disservice if some investors have to wait a little longer to find out what the 743rd holding in the Total International Stock ETF [VXUS] is,” Joel Dickson, Vanguard’s senior ETF investment strategist, said. “The risk is that investors in the mutual fund or ETF could see front-runners such as high-frequency traders and hedge funds artificially drive prices in different directions.”
Some industry observers also point out that access to real-time pricing data is limited, specifically for the numbers provided to institutional investors and market makers that track underlying securities relative to the ETF’s NAV.
“Contrary to what most people think, the ETF industry hasn’t maintained a completely open book,” Michael Johnston, an analyst at ETF Database, said in the article.
Although, Johnston notes that contracts between fund sponsors and data providers on when and what to report can vary. Additionally, information on international or less liquid markets may be even more difficult to ascertain on a daily basis. [What is an ETF? — Part 5: Know Your Holdings]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.