Much has been said about the significant growth of exchange-traded funds (ETFs) since they burst onto the investment scene 25 years ago. The benefits of ETFs are easy to see. They are generally low cost and easy to use, they provide investors with the ability to gain diversified exposure to different stocks in a single transaction, and they create tax efficiencies by giving investors greater control over the timing of capital gains and losses.
It should come as no surprise that proponents say ETFs have helped level the playing field for investments and broadened the opportunities available for investors to build wealth. But a major benefit investors should keep in mind when looking to invest in an ETF is transparency.
Perhaps the unique quality of ETFs is that they allow investors to ‘look under the hood’ and see exactly which securities their fund holds, giving them the tools to undertake comprehensive due diligence when it comes to ensuring that their ETF is helping to improve portfolio outcomes and meet their investment goals.
But what do investors actually need to know about transparency when it comes to ETFs? Here are the top three things that investors should know when they ‘look under the hood’.
1. Investors can review their fund’s holdings daily
Unlike managed funds, ETFs allow investors to see exactly which securities their fund holds on any given day. ETFs publish full portfolio disclosures daily, which investors can access from the ETF issuer’s website.
Visibility into a fund’s holdings provides a range of important benefits. Reviewing the daily portfolio holdings available on an issuer’s website will provide investors with clear oversight of every stock or security they have invested in, which can help coordinate their ETF with the rest of their investment portfolio.
For investors looking to invest in ETFs, transparency equips them with all the tools they need to understand exactly what they are buying and ensure that it reflects their broader investment goals.
2. Investors know exactly what they are paying for
Many investors seek out ETFs because they are a low-cost option. As an investment that is designed to track an index, ETFs are typically less expensive to operate than actively managed funds, which means they will usually have lower management costs.
The ability to ‘look under the hood’ with an ETF also plays a part in helping investors monitor and ensure that they are paying the correct fees for the exposure they are receiving. This means that investors can use transparency to avoid unwanted costs or higher fees than expected.
Transparency also plays a part in helping investors choose the right ETF when it comes to cost. For example, an investor might find that an ETF they have invested in has the same or similar holdings as an ETF from a different issuer which they can access at a lower cost.
3. Investors have clear insight into the fund’s investment strategy
Accessing a fund’s holdings on any given day provides investors with a clear window into the fund’s overall investment approach and strategy. This is particularly important for investors who are on the hunt for diversification.
ETFs offer one of the easiest and most accessible ways for investors to diversify their portfolio. With one trade, an ETF can provide broad exposure across a market segment, which can help reduce risk and achieve smooth investment returns.
Diversification has been a clear driving force behind the rise of ETFs and brings many advantages for investors. The transparency that comes from ‘looking under the hood’ helps keep things simple, ensuring that investors understand exactly what they are holding and where their fund has invested.
This ability is a unique attribute of an ETF and brings a range of benefits to investors. Transparency is an important step in undertaking comprehensive due diligence and plays a clear role in helping investors improve portfolio outcomes and meet their investment goals.
Meaghan Victor is head of SPDR ETFs, Australia, at State Street Global Advisors.