Exchange traded funds are known for their transparency, disclosing underlying holdings on a daily basis. However, Vanguard Group does not publish its daily underlying components.
Doug Yones, head of Vanguard’s domestic equity indexing and ETF product management, argues that it is in the interest of the shareholders for the ETF sponsor to keep more tight lipped about its ETF holdings as it helps prevent so-called front-running and free riding.
Specifically, traders could jump ahead of larges-scale buying and selling when ETFs disclose holdings on a daily basis. As an index is reconfigured or rebalanced, the changes can affect the share price of constituents. Meanwhile, in free-riding, market players would capitalize on the institutional trading.
“Front-running and free-riding are real costs,” Yones said in the article. “Everything we do is in the interest of the holder of the fund.”
Vanguard may also adhere to its monthly disclosures as a way to protect the proprietary indices that the company’s ETFs track. The provider swapped out MSCI benchmarks on a group of U.S. stock and international stock ETFs for University of Chicago’s Center for Research in Security Prices, or CRSP, and FTSE indices in 2012. [Vanguard Changing Indices for Several ETFs]
In contrast, widely tracked indices from MSCI, S&P Dow Jones Indices and Russell Investments are harder to front-run or free-trade, whereas the FTSE and CRSP indices have more customized holdings.
“What’s inside isn’t always as obvious,” Todd Rosenbluth, director of ETF and mutual-fund research at analysts S&P Capital IQ, said of CRPS and FTSE.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
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.