The actively managed exchange traded fund space only makes up a fraction of the overall industry, but with big-name players expanding into the space, like PIMCO, we may begin to see a rapid explosion of prominent managers lending their expertise to ETF investments. However, there is a catch.
The new wave of actively managed ETFs will have managers guiding the funds to achieve high performance, but they may work around transparency rules and limit their disclosures into holdings, reports Murray Coleman for the Wall Street Journal. [Pendulum Shifts to Active ETFs]
Daily disclosure in passively indexed ETFs is a given as fund sponsors need to show daily holdings to market makers, or “authorized participants,” to create or redeem ETF shares, which help keep ETF prices close to their net asset values.
Active managers, though, don’t like to reveal their secret sauce. [PIMCO ETF Paves the Way for More Active Funds]
“The concern is that competitors such as hedge funds and high-frequency traders will front-run their portfolios,” consultant Christian Magoon, former president of Claymore Securities, said in the article. Front-running refers to how individuals may ascertain a manager’s position and start buying or selling the same position ahead of the active manager.
Magoon notes that while smaller actively managed ETF providers have been allowing full transparency, big-name stock pickers may not want to fully disclose their positions.
“The active ETF marketplace needs to attract more big-name stock-fund managers to gain traction with mainstream fund investors,” Magoon added.