ETF transparency

The securities in an ETF portfolio are made public every day, and since those securities also appear in the index that the fund tracks, the subclass to which the ETF belongs — for instance, small- or large-cap stocks, long-term or short-term corporate bonds — is crystal clear. That means that ETFs may simplify the process of building a portfolio that corresponds to a specific asset allocation or diversification model.

That is not always the case with actively managed mutual funds. While mutual fund managers focus on a particular market segment to meet their investment objectives, they may actually shift the makeup of a fund in some circumstances. For example, under certain market conditions some funds may hold a substantial percentage of their assets in cash. Others may seek to improve their returns by buying securities in different segments of the market to take advantage of short-term growth. Such strategies might alter your portfolio balance without your being aware of it, or leave you underweighted or overweighted in a particular asset subclass.

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