Originally published in David’s LinkedIn newsletter, “One Mann’s ETF Opinion.” Subscribe for the latest updates.
First, I apologize for the long and unacceptable gap since my last newsletter. I appreciate your patience with the irregular cadence as well as the messages I received from those who reached out to check in. That included some of my own colleagues following our celebration of the growth of our exchange-traded fund (ETF) franchise, along with my 10-year anniversary with Franklin Templeton.
During a recent interview, where we discussed my past ETF analogies (Taylor Swift, the Detroit Lions), I was asked whether I could come up with one on the spot, this time related to cooking. My off-the-cuff answer: meatloaf.
So why meatloaf? Recently, my wife made an outstanding version, using an award-winning restaurant recipe, one that the restaurant apparently had no issue sharing publicly. At about the same time those meatloaf ingredients were published, nearly all ETFs were publishing their weightings of underlying securities daily—a sort of portfolio “recipe.” Quick sidebar: I would be shocked if I were the first to draw a parallel between cooking and the transparency of ETF creation/redemption process.
As I reflected on my answer, two additional elements came to mind that merit further scrutiny.
Why would the restaurant give away their recipe?
There was one aspect to that rocking home-cooked dinner that I have not mentioned. It took my wife a TON of time to prepare. There were nearly 20 ingredients she had to track down, which then had to be chopped or minced or sauteed. (This, of course, resulted in dirty dishes all over the place. And if you think my kids volunteered to help with any of that cleaning, you might be new to this newsletter). So, long way to say, there are real time and energy benefits to just heading to the restaurant and dining out.
I could say the same about ETFs. Yes, the underlying securities baskets are published daily, but there is no doubt that it is much easier for most investors to simply buy the ETF as compared to trying to buy 50 or 100 or 500 stocks or bonds and then monitoring those positions daily to see if the weightings have changed. Yes, I realize the analogy is not perfect as I don’t expect the restaurant to need to tweak their meatloaf recipe on a regular basis. But I would not be shocked if, on occasion, there was a minor adjustment.
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Should some restaurants protect their meatloaf recipe?
Given that there are so many variations of meatloaf (type of meat, bacon-wrapped, seasonings, breading, etc.), I can appreciate the instinct to keep an award-winning recipe hidden from the public. The effort required to make the dish might be the same, but there’s a case that competing restaurants might acknowledge their own version as inferior and modify based on a superior product. That could lead to a real loss of revenue for the original restaurant if their meatloaf is now available everywhere.
Consider now that one of Franklin Templeton’s largest ETFs is semi-transparent, which means its holdings are NOT published daily. When I first joined Franklin Templeton, daily transparency was one of the main ETF attributes I tended to highlight for clients. This was right alongside intraday trading and tax efficiency. My thinking on this topic has evolved, as I now appreciate why some portfolio managers may want to hold their intellectual property close as a competitive edge. Furthermore, when I look at a fund’s intraday trading and tax-efficiency, I feel the client experience of buying and selling should be identical to similar ETFs that are fully transparent.
The ETF industry has evolved mightily over the past decade, and some ETFs can now hold structured products, digital assets, swaps, and options that I never could have imagined back then. To me, that makes the semi-transparent conversation a bit of yesterday’s news, as the structure has by and large been working as intended. I am thankful to our internal communications team for helping me tap my “inner chef” to get this newsletter back on track.
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