Exchange traded funds are know for their transparent nature, revealing underlying components for anyone to see. However, the issue of transparency remains contentious within the financial industry.
ETF transparency provides updated value of holdings, which help arbitrage opportunities to maintain liquidity and avoid price swings, reports Jackie Noblett for Ignites.
Exchange traded products, which include ETFs and exchange traded notes, disclose their holdings on a daily basis and provide estimates of their net asset value, or intraday indicative value or IIV, in 15 second intervals throughout the day.
However, some are questioning the need for daily transparency. For instance, Vanguard argues that its own ETFs have experienced tight exchange pricing with only periodic disclosure of portfolio holdings – since Vanguard ETFs are categorized as a separate share class of its mutual funds, the company does not disclose ETF holdings on a daily basis. [Why Vanguard Stock ETFs Are Slightly More Opaque]
“Years of market experience demonstrate that a well-constructed basket with performance that closely tracks the performance of an index promotes efficient arbitrage,” Vanguard said in a letter to the Securities and Exchange Commission, noting that traders have a number of tools, like the indicative intraday value and the ETF’s published basket or its last portfolio components list in its index and other data points, in order to identify arbitrage opportunities.
Moreover, some active fund managers have argued that full transparency can hurt shareholders as other market players can try to front run a fund provider’s strategy before an ETF makes its changes, which would potentially increase prices an ETF pays for new allocations.
Consequently, the transparency issue among actively managed strategies has led to the recent efforts of Precidian Investments for a non-transparent ETF offering. Precidian plans to allow issuers to create a blind trust and redeem active ETF shares to protect portfolio holdings from the market. However, the SEC has so far rejected the plan.
The SEC, though, has approved Eaton Vance’s proprietary exchange traded managed fund, a net asset value-based fund methodology. The ETMFs will combine some of the best features of ETFs and traditional actively managed open-end mutual funds. [SEC Again Rejects Precidian Non-Transparent ETFs, Solidifying Eaton Vance Lead]
On the other hand, some have even called for greater transparency and changes to the IIV to improve pricing. For instance, Georgetown University professor and market structure expert James Angel suggests requiring firms to publish separate IIVs for the bid/ask prices, raising the frequency of IIV publications and updating the data on a firm’s site. BlackRock has also argued for improved transparency and improved intraday indicative valuations as a way to better facilitate market participation and liquidity.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.