5 transparency benefits of ETFs
Underlying holdings and fee clarity rank among the key transparency-related advantages of exchange-traded funds, says State Street's Meaghan Victor.
Underlying holdings and fee clarity rank among the key transparency-related advantages of exchange-traded funds, says State Street's Meaghan Victor.
Growing popularity of index investing has increased the available menu of exchange traded funds - more than 150 are now listed on the Australian Securities Exchange. It has also simplified the task of navigating investment opportunities, thanks to their inherent transparency.
Knowing what you own is an important investment principle, regardless of the investment type. For those investors scouring the ETF universe for their next opportunity, here are five reasons why transparency should remain top of mind when evaluating each opportunity.
1. Clear display of underlying holdings
In addition to being low-cost, ETFs are uniquely transparent in enabling investors to regularly review their holdings - simply by downloading the daily portfolio holdings statement from the issuer’s website.
This distinguishes ETFs from exchange traded managed funds. Commonly referred to as active ETFs or managed funds, these products tend to have a lag in reporting of up six weeks, if not longer, before investors can access information about the fund’s holding.
2. Investment approach insights
With access to a fund’s holdings comes greater clarity around a fund’s investment approach. The transparent nature of an ETF means investors can review their investments as often and in as much detail as they require.
While some funds have a straightforward name - such as the SPDR® S&P®/ASX 200 Fund (STW), others are more complicated. Investors need to look beyond the name and get "under the hood" to examine the underlying holdings.
This provides for a more detailed understanding of the fund’s risk/return profile, and enables investors to judge for themselves whether it delivers on the stated objectives and investment approach.
3. Understanding of what the investment costs
Access to daily portfolio statements can also help investors ensure they are paying the correct fees for the exposure they want.
The ability to take an in-depth look at what each ETF is holding can provide the knowledge necessary to make informed investment decisions. For example, an investor may find an ETF they have invested in holds the same, or very similar exposure, as another lower-cost ETF.
4. Greater clarity around product structure
The transparency provided by ETFs can allow investors to evaluate whether a fund’s structure helps to mitigate portfolio risks and promote liquidity.
A greater number of holdings in a fund can help investors access increased diversification benefits during times of market volatility. Transparency also helps investors analyse how well an ETF tracks against its benchmark. Ideally, an ETF that seeks to track the performance of an index should follow this quite closely.
5. Assists identification of portfolio overlap
Understanding how different investments will interact within a portfolio is important for investors looking to build a diversified portfolio.
We know that ETF transparency allows investors to identify a fund’s holdings, its investment approach and structure. The combination of this information can then help identify whether an ETF’s holdings will overlap significantly with other holdings in their portfolio.
Diversification aims to spread risk across asset classes and geographies. The ability to take a detailed look at an ETF’s holdings on a daily basis empowers investors to understand how their investments will interact and can also help to avoid concentration risk.
The Australian ETF market is on a clear trajectory for growth, and with that growth will come greater product choice and availability. So that investors can make informed choices for their portfolio, it is essential they understand the unique benefits of ETF transparency.
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Meaghan Victor is head of SPDR ETFs, Australia, State Street Global Advisors.
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