Proxy Voting by Exchange-Traded Funds: An Analysis of ETF Voting Policies, Practices and Patterns

Abstract:     
Exchange-traded funds (ETFs) are an important and growing segment of the securities markets and have amassed considerable voting power through their equity holdings. This study examined the proxy voting policies, guidelines and recent voting records of seven of the largest exchange-traded fund sponsors. We found that, among these large ETF sponsors, there is considerable variation in the voting patterns and philosophies of these funds. This variation is highlighted by how the seven funds voted during the 2008 proxy season at a sample of twenty-one specific votes on a variety of important governance and social policy issues. On one end of the spectrum, Profunds voted with management on only 5 of the 21 proposals in our sample; at the other end, Rydex voted with management on 19 of the 21 proposals, with the remaining funds falling in between.

We found some evidence that the three largest ETF sponsors - Barclays Global Investors, State Street and Vanguard - who together have a dominant share of the ETF market, are somewhat less likely to vote against management on management proposals and shareholder proposals than are most of the smaller fund sponsors. On the other hand, the three largest ETFs also appear to withhold votes from incumbent directors at a greater number of companies than the smaller funds. This likely indicates the use of 'withhold' votes against directors as a substitute method for expressing dissatisfaction with certain management practices, rather than voting against management on specific proposals. Our voting review also found that funds that relied heavily or exclusively on a proxy advisory firm for their voting guidelines tended to vote against management more frequently than those that did not.

The votes examined were generally consistent with the written voting policies of the funds, although we identified a few cases where votes appeared to be potentially contrary to a fund’s written voting policies. Case-by-case voting policies are utilized by many of the funds - where voting decisions are based on the specific facts and circumstances at a particular company, as well as on the issue being voted - and explain some of this consistency.

There were also significant differences between the ETFs in terms of the level of detail and length of their proxy voting guidelines, with firms relying on guidelines provided by proxy advisory firms tending to have the most detailed, and also the most prescriptive, voting guidelines. Proxy voting guidelines ranged from lengthy documents describing highly detailed voting guidelines on a wide range of issues to very cursory guidelines that stipulated voting with management on virtually all issues.

Number of Pages in PDF File: 31

Keywords: proxy voting, corporate governance, ETFs

JEL Classification: G3

working papers series