ETFs Are Not Really Transparent

March 02, 2010

Proponents of exchange-traded funds love to say that ETFs are “fully transparent.” They’re lying.

The concept of “transparency” in ETFs is so pervasive that people just assume it’s true. Look at almost any ETF provider’s Web site and you will see the word “transparency” highlighted as one of the key benefits.

If you go to, for instance, you’ll find the following, right at the top of the page:


iShares transparency


You can see similar messages at State Street Global Advisors, PowerShares, Vanguard and others.

But there is actually no rule requiring index-based ETFs to disclose their portfolios any more frequently than traditional mutual funds. And for many ETFs, portfolio disclosure is either incomplete or significantly delayed. And the problem is getting worse.

The Myth Of ETF Transparency

The myth of ETF transparency stems from the fact that ETFs must publish their “creation baskets” at the end of every day. The creation basket is the shopping list of securities—tickers and numbers of shares—an institutional investor (aka, an “Authorized Participant”) must deliver to an ETF issuer if he or she wants to create a tranche of new shares in an ETF. For instance, the creation basket of the SPDR S&P 500 ETF (NYSEArca: SPY) will likely contain all 500 stocks in the S&P 500 in approximately the same weights as those stocks that exist in the index.

Creation baskets are often extremely close to the actual holdings of a fund, but they don’t have to be. For large-cap domestic equity ETFs, they’re usually identical. But as you move into less liquid areas of the market, a significant gap can develop between the contents of the creation basket and the holdings of the underlying fund, all the way until they are so divergent that the ETF issuer just asks for cash.

Take the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). Due to an index licensing issue with MSCI, iShares only discloses the full portfolio for EEM on its public Web site on a month-end basis. As of March 1, 2010, the last portfolio holdings data available was as of Jan. 29, 2010.

If you have access to a Bloomberg machine (costing >$20K/year), you can see the full portfolio. I imagine if you picked up the phone and talked to someone at iShares on any given Tuesday, they’d probably fax it to you as well. And what you’d find is that the actual holdings differ significantly from the creation basket.


EEM: Portfolio Vs. Creation Basket

Portfolio Weight

Creation Basket Weight







Petroleo Brasileiro/A



Itau Unibanco






Petroleo Brasileiro












Source: Bloomberg. Data as of 2/26/10.


We’re not talking small differences here. Samsung has almost a half-percent bigger role in the creation basket than it does in the ETF. The reasons for these discrepancies aren’t nefarious—they’re common sense. The basket is simply smaller, ignoring the least liquid, hardest-to-buy securities. One assumes that those securities might be purchased in a later basket, if the manager really felt they needed them for tracking purposes. But in general, the basket is optimized to be “easy to buy” for the AP. That’s a good thing, because an involved AP means lower spreads on the ETF itself.

Most iShares—indeed most ETFs—provide full portfolio-level disclosure on their public Web sites on a daily basis. But some, like EEM, have halting disclosure at best.


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