Transparency is one of the hallmark characteristics of ETFs
and one of the most important factors that distinguishes
ETFs from other investments including mutual funds. ETFs
provide daily listings of their underlying component securities
(whether they follow a replication or representation strategy).
And index providers usually offer transparency about their
constituents and advanced notice of any changes.
Why is Transparency Important?
Transparency is important to investors and prospective ETF
investors so that they can know exactly what securities the
ETF holds and in what percentage. This allows ETFs to be
more efficiently incorporated into portfolios without possible
security overlap. Unlike mutual funds that only have to
periodically report their holdings and can almost invisibly
trade in and out of securities between reporting periods,
ETFs come with built-in daily transparency.
Transparency is also important for Authorized Participants (APs) so they can know what securities must be delivered or
received, and in what amounts, in order to bring about creations
and/or redemptions of an ETF.
Transparency also allows market participants and investors
to better determine what securities an ETF holds so that
they can determine what securities to hedge.
An ETF’s Intraday Indicative Value (IIV)—which seeks to
estimate the price of the ETF’s net asset value every 15
seconds throughout the trading day—is one of the key
components to an ETF’s transparency. Because it’s updated so often, the IIV enables investors to have a real-time approximate
value of the ETF throughout the day. It’s important to
realize that the IIV does not reflect the value at which the ETF
share can be created or redeemed—the NAV reflects this.
ETFs’ extreme transparency allows investors to have a better
sense of their true valuation. Because ETFs are priced
throughout the day and offer transparency to their underlying
holdings, investors can be comfortable with the market
price offered by the ETF’s market specialist. In fact, APs,
which are large broker/dealer firms that have the ability
to create and redeem ETFs shares and make markets, can
benefit from the transparency of an ETF. For example, if the
price of the underlying stocks is below the price of the ETF,
the AP will buy the underlying securities and convert them to
shares in the ETF (while selling the ETF in the open market).
Important Points to Remember
Exchange Traded Products can hold a variety of financial
instruments, such as stocks, fixed-income securities,
currencies, commodities and derivative securities.
ETFs use either a replication or a representation strategy
to track an index. A replication strategy is used when an
ETF invests in exactly the same securities included in the
underlying index. Representation, or sampling, mirrors the
composition, market exposure and performance of the
underlying index without holding every security.
When the index that an ETF tracks rebalances or reallocates
its underlying securities, an ETF sponsor will generally
mirror those index changes.
An ETF’s intraday indicative value (IIV) is a key component
of its transparency. Because it is calculated every 15 seconds,
investors have a very good sense of an ETF’s true valuation.
This transparency also enables investors to avoid securities
overlap and, if desired, determine what securities to hedge.
This information is subject to change at any time and should not be construed as a recommendation of any specific security
or strategy.
This information does not constitute tax advice. Please consult your tax advisor and/or state and local tax offices for more
complete information.
Securities are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks,
including the possible loss of the principal amount invested.
RydexShares™ are distributed by Rydex Distributors, Inc., an affiliate of Rydex Investments.
Rydex Investments 9601 Blackwell Road Suite 500 Rockville, MD 20850
800.820.0888 Send us your comments
For more complete information regarding Rydex funds, call 800.820.0888 or click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund's prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.
Variation on a Theme:
Cap-weighted Indices vs. Other
Weighting Methodologies
Many indices are purposefully
structured such that companies
with larger capitalizations are more
heavily weighted than companies
with more modest capitalizations.
These are referred to as “capweighted”
indices. Consequently,
a very large company may account
for a 10% component of the index,
while another company may only
account for 0.5%.
Equally weighted indices may
contain all of the components of
a similar cap-weighted index, but
instead of awarding larger companies
larger allocations of the
index, all component companies
occupy an equally weighted slice.
An equally weighted index of 50
companies, for instance, would
allot an equitable 2% to each and
every company and periodically
rebalance to maintain that 2%
individual allowance.
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