When Transparency Hurts Investors
- Joshua M Brown
- January 24th, 2011
There's a strategic necessity behind the delayed release of 13F filings (45 days after the end of a quarter) - if professional investors had to run funds like a poker game with upturned cards, their edges would be gamed and whittled down to nothing overnight.
This is one example of a scenario where a lack of transparency actually benefits individual investors. The opacity of commodity mutual funds versus ETF houses-of-glass is another.
MarketWatch is reporting that in 2010, "commodities mutual funds have proportionally seen roughly five times the net inflows of commodities ETFs." This bucks the prevailing trend of investors choosing stock ETFs over mutual funds when looking for exposure to the stocks.
Why are investors opting for mutual fund vehicles over ETFs when looking for commodity exposure? There are mechanical issues at play here having to do with futures and swaps, but there is also strategic advantage to the mutual fund structure that hasn't been discussed much in media...
Commodities ETFs can also suffer because of their transparency — namely their roll-over dates of their contracts are known by the market.
“The ETFs are so transparent that they were easily gamed,” said James Shelton, chief investment officer of Houston-based invest Kanaly Trust, which manages $1.6 billion for clients. “Mutual funds have done a better job of hiding what they’re doing.”
It's nice to buy an ETF and feel secure in the knowledge that it is an open book, but in certain markets, an open book is exactly what you don't want.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.