Reasons To Love Transparent ETFs

February 28, 2014

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Trial by fire is one way to discover why ETF transparency matters.

I would never be in the ETF industry if not for the crash of 2008 and a fellow named George.

George—as in the chief executive officer of Contango Capital Advisors—hired me when I completed my master's degree. I started in August 2008. You know what happened next.

With the crash in full swing, Contango's portfolio of—purportedly—defensive mutual funds failed spectacularly. The managers George had vetted did not cash out ahead of time, nor did they position their portfolios for free fall. Quite the contrary—several of them lost more than their benchmarks did. From an advisory perspective, the game had changed. We owed our clients in-house, pro-active due diligence.

George wanted to be able to assess risk in his portfolios, using holdings. Since he was predicting a slew of corporate bankruptcies, he wanted to build a portfolio of firms with solid balance sheets. The corporate bankruptcies never materialized, but what I learned in building George's new portfolio turned me into a transparency zealot.

Mutual fund disclosure policies blocked my efforts to find up-to-date portfolios. In October 2008, most mutual fund websites were presenting holdings as of June 30, 2008. Portfolios suffered redemptions and panic-selling following the Lehman collapse.

I could not expect June's data to apply to the post-crash world.

September's portfolio would appear after Thanksgiving. Mutual fund issuers follow Securities and Exchange Commission requirements to post quarterly holdings disclosures, within 60 days of quarter's end. In those days, 60 days was an eternity. With all the chaos, a portfolio could turn over twice in that time.

By comparison, exchange-traded funds delivered transparency daily, often in analyst-friendly spreadsheets.

Bloomberg provided security-level metrics like debt/equity ratios and quick ratios. Once I layered in some cumulative probability of default metrics, I could assess the credit risk of equity and fixed-income ETFs.

With holdings transparency and timely security-level data, George could reclaim his fiduciary role, and steer his clients into well-vetted ETF-based portfolios.

The work I did for George laid the cornerstone for's Analytics service. I no longer run credit analyses on equity ETFs, but I am still a huge advocate of transparency. Daily disclosure means I can compare funds in real time, across the board. Portfolios are more stable than they were in 2008, but they are not static. Sometimes timing really matters.

The U.S. telecommunications sector has plenty of action these days. If you listen to's morning call, you can confirm that we have recently discussed the Comcast–Time Warner merger and Netflix's efforts to break down net neutrality. To cut back to the chase, Telecom is a dynamic sector these days. Transparency lets us do timely analyses like this:

Equity: US Telecoms Fit Summary

Ticker Weighting Selection Goodness of Fit R2 Beta Average Market Cap P/E P/B Div Yield Number of Holdings Note
VOX Vanguard Telecommunication Services Market Cap Market Cap 0.80 0.85 $68.45 B 159.19 2.99 3.38% 32 Best pure play
IYZ iShares U.S. Telecommunications Market Cap Market Cap 0.53 0.77 $42.25 B -16.73 2.50 3.11% 25 Poor Fit to benchmark
XTL SPDR S&P Telecom Proprietary Proprietary 0.31 0.63 $16.0 B -12.43 2.34 1.22% 56 Small tilt, big industry deviations
FCOM Fidelity MSCI Telecommunication Services Market Cap Market Cap 0.79 0.81 $68.18 B 273.30 3.03 3.37% 32 Representative

Ranked by Fit Score



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