IF.com: Is there a way to post the NAV without having to disclose what it consists of?

LK: That's where a lot of the research is going in, not only here but in other firms. Is there a way to make changes in a basket or an index that would be close enough, and you could still post the NAV, find a way to take in securities, continue to ensure that the arbitrage mechanism works, and at the same time not have to give away all the holdings every day? That's going to take some more work on an operational basis and it's also going to take some work in the regulatory front to get that through. Because no one's tried doing it yet.

IF.com: A couple of questions on the competition. Any comments on Vanguard's assertions that the trading costs make ETFs more expensive than open-ended funds for many smaller buy-and-hold investors?

LK: Again, with any investment product, any investor ought to assess the costs, the benefits, and the tradeoffs between alternatives and pick what's best for them. No single product in investments or anywhere else is right for everyone. We already talked about the small dollar cost averager, for example, as somebody who is probably not going to benefit from the exchange-traded fund. That having been said, you have to look at each individual situation. The primary benefit of exchange-traded funds is that they have very low costs and very high tax efficiency. And if you are holding for the long term, the actual cost of the brokerage commission - which is definitely going to be there unless you're in an unlimited trading account which are increasing in popularity, but let's assume you're not - you're going to have to pay that. The tradeoff is going to be how long you're staying in the fund, how much you're saving, and how much you're paying for that trade.

IF.com: Vanguard is saying that, on the average, you lose a half point or a point.

LK: But there's no free lunch in the securities market. If you're a mutual fund investor, somebody has to pay the bid/ask spread. And you may not pay it when you go into a mutual fund, per se, you may not see it, but the fund pays it.

IF.com: I guess Vanguard's basic point is for a retail investor, you're more likely to get the lower end of the ask/bid spread than a large institutional investor.

LK: Why?

IF.com: Because with volume, you can narrow down the ask/bid spread and get closer to the middle.

LK: The market that institutions are trading in on the floor of the exchange is the same market that the individuals are trading in, and it's quoted there. And there are exchange rules that cover all equity and exchange listed securities, that try to ensure fairness between retail investors and large institutions. You'd have to talk to the American Stock Exchange. But that's an important part of exchange regulations: ensuring that institutions are not always getting better execution than the retail public. And so, there are no free lunches when it comes to transactions cost in that sense. Now with the ETF, you may see it when you actually go purchase the ETF, but the good news is that the portfolio didn't have to just go purchase securities and pay a bid/ask spread. So you have to take all of the costs and benefits into account, including the holding period. Also you need to take into account the relative tax efficiency, because that matters too.

<<Previous                           Next >>

Printer Friendly Page