By Jack N., FocusShares® Communications Analyst and Blog Contributor
Exchange-traded funds (ETFs) have long touted “transparency” as a key advantage. So what is transparency, and why is it important?
What is Transparency?
Quite simply, transparency means that you can easily find out what securities the funds hold and in what percentages. Nearly all ETFs report their list of holdings each day. This is because most are required by federal regulators to provide full daily transparency, but those who are not often still do since the practice is so widespread.
Why Care About Transparency?
Knowing what’s in specific funds can help you find ETF opportunities and implement your investment strategy.
For starters, transparency can help manage risk by protecting investors from making uninformed decisions. Let’s say you’re nearing retirement and want to move money from riskier securities to less risky high-quality fixed-income or bond investments. Even a fund that claims to predominantly hold high-quality bonds might have some junk bonds thrown into the mix. By checking out an ETF’s holdings list, you can tell precisely whether you are comfortable with that ratio of lower-grade bonds before investing. Plus you can periodically check your holdings to see if the ETF is staying the course or veering toward the riskier side.
Transparency also can help you know whether you might be overweighted (or underweighted) in a company, a sector or a country. For example, let’s say you want to own an ETF that invests solely in Chinese stocks, but you already own an international stock ETF. You can easily check that international ETF to see what percentage of its holdings are Chinese companies.
Ultimately you should care about the daily transparency that is offered by ETFs, such as all 15 FocusTM Morningstar ETFs, which are available commission free for those who use Scottrade’s online platforms. With transparency, you get the advantage of better navigating your investment opportunities and recognizing any needed course corrections.
To find out more information about ETFs visit Scottrade’s Knowledge Center, and to find out about FocusTM Morningstar ETFs, go to www.focusshares.com. Next month we’ll look at how index investing has helped keep ETF expenses low.
Has the transparency of ETFs helped with your investment planning?
Jack N. has been with Scottrade since 2011. He is responsible for public relations for FocusShares®.