The $2 trillion market for U.S. exchange-traded funds is growing more opaque even as regulators warn the asset class is already too complicated for some investors.
Eaton Vance Corp. began offering a new type of ETF on Friday -- called Eaton Vance Stock NextShares -- that only reveals its underlying assets monthly, rather than the daily disclosure that’s common in the rest of the industry. Soon, that lag will get longer, as other fund issuers plan ETFs that discuss holdings only every quarter.
Separately, investors can now trade ETFs privately on Tradeweb Markets.
The ETF market has exploded in size, jumping 2 1/2 times in value since the end of 2009. Even before these Eaton Vance and Tradeweb innovations, U.S. officials were already worried the business lacks sufficient transparency. Cracks in the system were revealed on Aug. 24, when many equities didn’t open for trading, yet the ETFs that hold them did, causing confusion among investors about their value.
Kara Stein, a U.S. Securities and Exchange Commissioner, earlierthis month expressed concern that the ETF market has already become too difficult for retail investors to understand.
“I fear that the risk presented by some of these new products may not be fully understood by those who have invested in them,” Stein said at a conference in Washington, speaking generally about new ETFs. “Indeed, even plain-vanilla, equity index ETFs may present risks that are not always anticipated or fully understood, as evidenced by the events of Aug. 24.”
The Eaton Vance fund works like an actively managed mutual fund: Owners of the ETF share a claim to the stocks the portfolio manager buys. And those holdings remain secret for weeks or months at a time. But unlike a mutual fund, it can be traded throughout the day, not just once daily.
“It’s almost like these were products designed for institutions, but they’re easily available to retail investors,” said Kevin McPartland, head of research for market structure and technology at Greenwich Associates. “It’s certainly something to pay attention to.”
Aug. 24 showed the danger of having inadequate information about what’s going on with the underlying holdings of an ETF. Hundreds of stocks didn’t immediately start trading at the beginning of the day, but ETFs that held them did, effectively untethering the funds from the value of their holdings.