Maybe The Worst ETF Idea I’ve Ever Heard Of…

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November 16, 2011 1:48pm NYSE:DIA NYSE:SPY

Todd Shriber: Just because I am usually an advocate for the myriad advantages ETFs offer compared to mutual funds doesn’t mean I won’t hold the ETF industry’s feet to the fire when I come along what is in my opinion a bad idea. First, allow me to give you some background on the inspiration for this piece.

Last weekend, I was fortunate enough to speak to Baton Rouge chapter of the American Association of Individual Investors (AAII). Not only was treated to my first view of Tiger Stadium and some fine Southern food, the trip gave me the opportunity to talk with folks about why they like ETFs. One of my hosts told me that one thing she really likes about investing in ETFs is how easy to just go to an issuer’s Web site and find out exactly what stocks a particular ETF holds and what allocations.

Let’s just call that “ease of access” or “transparency” and it has been one of the hallmarks of ETF investing since the asset class came to be nearly 20 years ago. For that reason, I found a recent piece in Smart Money alarming and kudos to Smart Money for bringing this issue to light.

Basically, iShares, the world’s largest ETF issuer, wants to issue actively managed ETFs for which the funds’ holdings would only be disclosed on a quarterly basis rather than once a day. The Smart Money article notes the SEC hasn’t chimed in with an opinion yet, but the fear is if one ETF issuer gets approval for quarterly disclosures, others will likely follow suit.

To say this is a bad idea is a gross understatement. It’s unbelievable that ETF issuers, many of whom also operate in the mutual fund field, would cede one of their primary advantages and that is transparency. Not once have I spoken to an investor that complains about being able to see what his ETF holds on a daily basis and perhaps the worst ETF issuer Web site I’ve been on is a couple days behind in its holdings.

For example, on November 16, the Web site might be showing the ETF’s holdings for November 14, maybe the 11th, but usually not any worse than that. On the other hand, if you want to see what stocks the Fidelity Contra Fund, one of the more well-known mutual funds on the market, owns you’ll be treated to the fund’s holdings as of September 30.

Sorry, but that doesn’t sound appealing to me nor should it be appealing to investors who are trying to take control of their portfolios. The good news is, as Smart Money notes, actively managed ETFs only have about $6 billion in assets under management. That’s a barnacle on the whale of the over $1 trillion exchange-traded products business.

And let’s be honest. Actively managed ETFs haven’t really taken off because they sport mutual fund-esque expense ratios. Take away the transparency factor and investors will be left with an expensive ETF and they’re paying for the privilege of NOT knowing what the the ETF is up to.

I suspect that even if the SEC allows ETF issuers to introduce actively managed funds that only disclose their positions four times a year, investors will react and show iShares and the others that this was a bad idea. Frankly, it’s about as good of an idea as new Coke was back in the 1980s and we all know how that turned out.

Written By Todd Shriber From Global Profits Alert

Todd Shriber is an ETF fanatic, a former hedge fund trader, and a journalist. Todd started his professional career with Bloomberg News, where he covered banks, energy and technology.  After leaving Bloomberg, Todd became a trader at a California-based hedge fund where he specialized in trading financials, energy, basic materials, and ETFs.

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