Does The ETF Provider Matter?

October 25, 2010

A fourth, and related area, is tax management. Most ETF providers run a tight ship on taxes. But for whatever reason, certain ETF providers seem to do an incredible job. iShares, Vanguard, PowerShares and Van Eck come immediately to mind as providers that run hundreds of funds and almost never pay out capital gains distributions. They deserve kudos for doing a good job.

A fifth area to consider is share lending. Many ETF providers engage in share lending, which involves lending out the individual stocks held inside an ETF portfolio to short-sellers in exchange for a fee. I’m a firm believer in share lending, and think it’s a sensible way for an index fund to deliver enhanced performance with relatively low risks. But if a fund company is going to lend shares, all of the revenue from that activity should go back into the fund.

We recently published a study of ETF share-lending policies in ETFR. The list of companies with active share-lending policies that return 100 percent of the proceeds after fees to shareholders is relatively small: Vanguard, Van Eck and Rydex were among the few that commit to it. iShares, to take the other side, takes 35 to 50 percent of the revenue from lending and allocates it to the fund.

One last area to mention is transparency. Certain ETF providers disclose their full portfolios every day. Vanguard, however, only discloses its portfolios quarterly with a 30-day lag. iShares discloses some portfolios daily, but only lists its MSCI-linked portfolios on a quarterly basis.

While both iShares and Vanguard do a good job running funds, I’d prefer it if they disclosed their portfolios in full.

In the end, however, these factors pale in comparison to index selection. Choose the right index, check the expense ratio and monitor the trading spreads, and you’ll end up in a good place.

Choosing the “best ETF provider” is just a cherry on top.

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