“What investors need to understand is that for ETFs in emerging markets or high yield bonds, the ETF does a better job than the index in telling you where the market is at a given point in time,” Tucker said. “The discount is an illusion.”
That isn’t always true, Wilson said. Discounted or premium shares sometimes snap back to the value of underlying assets, and sometimes asset values will move to catch up with share price movements.
BlackRock’s Program
“To say the ETF shares are the most accurate is probably overstated,” said Wilson, who stays out of ETFs that track illiquid markets. “I’d rather not have to deal with it.”
BlackRock announced June 29 it was planning a “fresh program for investor education” to help investors understand how ETFs work.
ETF providers should work together to boost investor education efforts, Rick Ferri, founder of Portfolio Solutions LLC in Troy, Michigan, said in an interview. The firm manages $1.2 billion.
“There hasn’t been any real attempt by the industry to get together on this, and there’s been no pressure from the SEC or Finra to make it happen,” he said, referring to the Financial Industry Regulatory Authority, the brokerage industry’s self- funded regulator.
Finra’s Role
Finra in May 2012 fined Wells Fargo & Co., Citigroup Inc., Morgan Stanley and UBS AG a combined $9.1 million for selling leveraged and inverse ETFs to clients who didn’t understand them and lost money. The body first warned brokers and other advisers about the products in 2009.
“Finra continues to look closely at sales of ETFs and other complex products to assess whether the sale of these products to retail customers are suitable,” Brad Bennett, the group’s chief enforcement officer, said in an e-mailed statement.