Exchange traded funds are extolled for their transparent nature, providing investors with greater insight into what they are buying. However, there is a group of ETFs that do not offer daily holdings disclosure.
Most passively managed, index-based ETFs voluntarily disclose their holdings on a daily basis, but the Vanguard Group does not, reports Daisy Maxey for the Wall Street Journal.
ETFs trade like a normal stock on an exchange, so their price can fluctuate from the underlying net asset value of their component holdings – most ETFs passively track an index comprised of hundreds if not thousands of stock components. The disparity between an ETF’s share price and its NAV can create arbitrage opportunities.
Specially, authorized participants, or market makers, create or redeem shares to profit off the disparity between an ETF’s price and its NAV. For instance, if the underlying shares are trading above the market value of the ETF, APs buy ETF shares on the open market and form creation units. Then they redeem the creations units to receive the underlying shares and sell the shares on the open market for a profit. If the fund is trading at a discount to its HAV, market makers buy ETF shares and then redeem the shares for a basket of the underlying securities.
Most ETF sponsors opt to provide daily disclosures on holdings to help diminish premiums and discounts, keep tighter spreads and promote efficient pricing and arbitrage.
“This protects you and me as shareholders, so we’re buying at a price pretty close to NAV,” John McGuire, a partner at Bingham and co-chair of the firm’s global investment-management practice group, said in the article.
The Vanguard Group, on the other hand, has classified ETFs as an additional share class of its standard mutual funds. Consequently, ETF holdings are disclosed on a monthly basis with a 15-calendar-day delay.
“Efficient pricing, arbitrage, and hedging can all be achieved without daily holdings disclosure,” according to Vanguard. ” Vanguard ETFs do not disclose their portfolio holdings daily, yet have discounts/premiums and spreads that in most cases are as good or better than comparable competitor ETFs.”