In a recent episode of “Behind the Ticker,” Brett Eichenberger from Cohen & Company discussed the intricacies of auditing in the ETF and mutual fund industry. Eichenberger, based in the firm’s Cleveland office, has worked his way up over a 19-year career with Cohen & Company, which now audits over 1,800 registered funds, making it the fourth-largest auditor of registered funds in the U.S. and the second-largest in the ETF space. Eichenberger emphasized Cohen’s role in maintaining public trust through transparency and strict regulatory compliance, working with a range of investment products including ETFs, mutual funds, closed-end funds, and interval funds.
About Brett Eichenberger and Cohen & Co.
One of the central differences in auditing ETFs versus mutual funds, Eichenberger explained, lies in the valuation of securities. ETFs report returns on both NAV and market value bases, due to their trading on secondary markets, whereas mutual funds focus solely on NAV. Additionally, ETFs rely on authorized participants for capital activity through in-kind creation units, which introduces unique audit considerations, especially in managing the in-kind exchange of securities.
Investment Strategy and Approach
Eichenberger highlighted several key areas of focus in ETF audits, such as ensuring accurate valuation, particularly in complex portfolios that may include derivatives, foreign securities, or illiquid assets. For products like ETFs, Cohen & Company pays close attention to maintaining diversification standards and testing qualified income, which is essential for regulatory compliance. Eichenberger explained how Cohen’s audit teams perform regular assessments to verify all positions are accurately valued, confirming assets held in custody and ensuring that clients’ funds meet regulatory diversification requirements.
The discussion also touched on the impact of technology, including advancements in data-driven auditing that allow Cohen to move toward 100% testing of transactions, improving accuracy over traditional sampling methods. Eichenberger shared that the firm’s adoption of automation enables more efficient audits, allowing for better oversight and faster processing.
Deeper Dive: Insights from the Full Conversation
Beyond the headline strategy, the full conversation between Brad and Brett Eichenberger covered several additional themes worth highlighting for advisors and investors.
On Process and Philosophy
So it's really important that we understand the valuation policies and procedures of the investment company, and making sure that they're following those for different types of securities. That's what we've spent a lot of our time when you think about some of the differences between ETFs and mutual funds. There are some nuances ETFs report out both total return on an AV basis, that asset value basis. But also because they're traded on the secondary markets, we also report out market value total return.
Well a lot of ETF the one nice thing about ETFs is that most of them are in fairly liquid investments and and and open and funds are also you know restricted to so many percent of their assets being and non liquid investments 15%. So that's a good start for ETFs generally the when you're when you're putting together an ETF you're going to talk to your market makers you're going to want to make sure the names in your portfolio or liquid so when it comes to ETFs overall valuations generally better.
Market Context and Positioning
If if you're going to have non qualified income in your portfolio do you need a blocker controlled foreign corporation blocker that's put in place to invest in certain securities whether that be. Bit going because it's not considered a security or a commodity so we see you know if you're in a commodity ETF and you want exposure to different futures contracts you'd have to do those within your controlled foreign corporation what that does. You don't need to do 25% of the fund in that but it allows that income to be qualified income when it gets paid from the CFC up into the parent fund so we'll see that structure put in place.
So that's a new one similar to like a closed-end fund that you'd see in ETF versus a mutual fund. Some of the other differences that you'll see is the capital activity process. In a mutual fund, you have individuals buying and selling shares directly with the fund at an AV. Well, you still have an AV as the basis for buying and selling of the ETF, but they're done via creation units. And these are with authorized participants, not individual shareholders.
A scenario where you'd have a material weakness internal controls if there was a problem within the. The audit of the financial statement so it's an it's an important piece and with the ETF structure as well when you think about it. Different shops are set up for trading as well some do the trading themselves some outsource the trading. So you may be the investment advisor but you may have a sub advisor that's doing the trading of the portfolio.
Notable Insights
"That's what we've spent a lot of our time when you think about some of the differences between ETFs and mutual funds."
Key Takeaways
- Additionally, ETFs rely on authorized participants for capital activity through in-kind creation units, which introduces unique audit considerations, especially in managing the in-kind exchange of securities.
- Eichenberger highlighted several key areas of focus in ETF audits, such as ensuring accurate valuation, particularly in complex portfolios that may include derivatives, foreign securities, or illiquid assets.
- The conversation explores important themes in fixed income relevant to today's advisor landscape.
What This Means for Advisors
For financial advisors evaluating options for client portfolios, this conversation with Brett Eichenberger highlights important considerations around etf structure. Understanding the strategy behind each fund—not just the ticker—helps advisors make more informed allocation decisions and better communicate the rationale to clients.
The themes of etf structure and income investing discussed in this episode are particularly relevant in the current market environment, where advisors are increasingly looking for differentiated solutions that go beyond traditional benchmarks.
Listen to the Full Episode
This article is based on an episode of Behind the Ticker, hosted by Brad Roth, Founder and CIO of THOR Financial Technologies. For the full conversation with Brett Eichenberger, including additional nuances and details, listen on Spotify, Apple Podcasts, or watch on YouTube.