One of the selling points of exchange traded funds over mutual funds has been investors' ability to buy and sell them throughout the day, controlling the timing of their trades. Now Wall Street industry groups are backing a Securities and Exchange Commission proposal to eliminate one of the features of this trade.
Among other rules, the agency wants to abolish the practice of ETFs updating their net asset values every 15 seconds, something the industry says is cumbersome and often inaccurate. The SEC has proposed letting funds report their value once a day, at the close of trading.
So-called intraday net asset value has been a way for investors to assess how a fund overall is trading compared to its underlying securities. When an ETF's share price deviates from the value of its assets, however, it can be a sign that something is wrong. It's especially noticeable in volatile trading, when demand is exceeding supply or investors are having trouble unloading their holdings, for example.
And it only works for ETFs that track highly liquid securities. "While the idea of a contemporaneous measure of fair value is enticing, in practice, it is inaccurate for 80 percent of all ETFs," said Dave Nadig, the managing director of ETF.com, which is a subsidiary of CBOE Global Markets in a letter to the SEC.
One problem emerged just last week. As The Wall Street Journal noted on Tuesday, the ETFMG Alternative Harvest Fund, with $629 million of assets, ended the day Thursday at $43.01, or 41 cents above the value of its underlying assets, only to close the gap the next day. The popular fund, which invests in marijuana stocks, was switching custodians, according to ETF.com.
In its own letter last week, the Investment Company Institute said in fast-moving markets, the intraday value might lag the actual value or be inaccurate because the underlying securities don't trade often. "We strongly support the Commission's decision not to require the dissemination of an intraday estimate," wrote Susan Olson, the ICI's general counsel.
Comments on the proposal are due Oct. 1. Several of the comments already submitted urge the SEC to take action on another issue and finally allow a bitcoin ETF to go forward.