Keep iNAV; Encourage ETF Transparency

June 27, 2013

iNAV has its problems, but cool your jets guys.

I don’t often disagree with Matt and Dave, so it saddens me to do it publicly—but iNAV isn’t the problem. You’re both throwing out the baby with the bath water.

Matt made some great points in his most recent blog, as did Dave in his.

Yes, it’s true: iNAV is not perfect by many measures. It’s susceptible to mispricings in an ETF’s underlying basket—for international ETFs it’s a stale value, and for fixed-income ETFs, there’s no question the thing is a shadow of the true value.

Still, that doesn’t mean you throw the thing out completely.

Let’s step back for a second and look and what we’re discussing—ETFs.

These are products that trade intra-day. Unlike their mutual fund counterparts that are priced and invested just once a day, ETFs are designed to be liquid assets, and anytime you have a liquid asset, you need a point of reference to properly value that asset.

Really, there are two problems here that should be addressed: iNAV is long overdue for a proper upgrade. Secondly, investors need to start treating ETFs as ETFs—not as stocks, or mutual funds.

iNAV Upgrade

iNAV does a great job when it comes to U.S. equity ETFs, but even then it suffers from key issues that need to be addressed in an upgrade.

An ETF can be bought and sold faster than a click of a mouse. Not that I encourage such high-frequency trading behavior, but iNAV does need to reflect the times. The 15-second interval in ETF pricing that currently prevails should be replaced in favor of one-second updates.

If anything, the “flash crash” of May 6, 2010 is a testament to how the current securities-trading infrastructure can become unhinged in a matter seconds, and investors should be properly armed in their ability to assess the market. Publishing snapshots of iNAV in one-second intervals would surely help.

Secondly, iNAV needs to be specialized based on the underlying portfolio of the ETF in question. The calculation for U.S. equity ETFs is rather simple because the underlying securities trade during U.S. market hours.

But, crucially, that methodology has to be adjusted once you move outside that space.

Fixed-income, international-equity and commodity-based ETFs should be treated differently not only in their calculation, but with the proxies used to value the portions of the basket that aren’t liquid or trading.

Really, regulators and issuers should work on providing the investing public with fair-valued iNAV quotes—a service provided by few firms, but one that isn’t nearly as common as it should be.

To be fair, fair-valued iNAV quotes make assumptions that might not be realized in the underlying basket. But they still provide a solid reference point for investors.

The dissemination of these values is also a huge issue. It’s ridiculous to consistently note stale values on Google finance or Yahoo finance, and no one should have to spend around $15,000 to access a Bloomberg terminal for these values. The simple truth is that they should regularly update on ETF issuers’ websites.



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