One of the major talking points when it comes to actively managed exchange traded funds (ETFs) is the issue of transparency. Are they really as transparent as their index-tracking counterparts?

The SEC has deemed that for an ETF to be an ETF, one of the requirements it must meet is transparency. Naturally, this doesn’t excite all providers, some of whom may be loath to disclose their holdings and, in turn, their portfolio management strategy. [Reasons You May Like Active ETFs in Your Portfolio.]

Shishir Nigam for Active ETFs In Focus reports that many arguments and misconceptions about active ETFs are based on inaccurate facts and it’s important to bring some clarity to this much-debated issue. [Active ETFs: A Slam Dunk?]

  • Active ETFs have less transparency than other ETFs: Active and index ETFs are different in their transparency in that managers in active funds can hold anything they want whenever they want. Holdings, though, are disclosed daily.
  • Active ETF disclosure can result in front-running: The logic behind this argument is that if an active manager’s holdings are disclosed regularly, then short-term traders could use that disclosure to bid up their trades. Some providers have put in place a lag of one day, which has helped alleviate some of these concerns.
  • Disclosure can harm return to active ETF investors: In this misconception, it’s not front-running that’s the issue, but the consequences that come from revealing a long-term strategy. It’s a legitimate concern, Nigam notes, but the need investors have for transparency might outweigh these issues.

For more stories about active ETFs, visit our actively managed ETF category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.