Actively managed exchange traded funds (ETFs) are required to be transparent. That hasn’t always settled well with active managers, so they’re finding different ways to surmount the hurdles.
The Securities and Exchange Commission (SEC) has mandated that active ETFs are to disclose their holdings with a one-day lag. Some active managers have been discouraged by this requirement, fearful that it might result in front-running of their funds.
Shishir Nigam for Active ETFs recently noted a few of the ways some funds are dealing with the regulatory requirements:
1. Going the fund-of-funds route. AdvisorShares Dent Tactical (NYSEArca: DENT) and Mars Hill Global Relative Value (NYSEArca: GRV) are two examples of the approach. They disclose the ETFs the funds own each day. It’s more challenging for a front-runner to do it with ETFs rather than in individual securities. [Active ETFs And The Bid-Ask Spread.]
2. Market-on-close (MOC) trading. Some managers will use market-on-close instead of trading intraday. The benefit is two-fold: the portfolio manager gets the closing price, and liquidity is greater at MOC. AER Advisors, the sub-advisors for PowerShares Active AlphaQ (NYSEArca: PQY) and PowerShares Active Alpha Multi-Cap (NYSEArca: PQZ), takes this approach.
3. Shrugging their shoulders. Some managers recognize that it’s not very cost-effective for an individual investor to copy the portfolio and follow along. One portfolio manager says that the majority of investors would take the convenience of an active fund vs. trying to do it themselves just to save a few dollars a year.
The fact is, transparency benefits investors and it’s part of what makes active ETFs stand out from mutual funds. Mutual funds aren’t required to disclose their holdings more than once per quarter, and what you see on that statement may not be what’s currently in the portfolio. Perhaps others considering launching active ETFs will be persuaded to join in when they see that active management and transparency can work well together. [Actively Managed ETFs a Flop? Not So Fast.]
Visit our active management category for more stories about these types of ETFs.
Tisha Guerrero contributed to this article.