Institutional investors have for the most part resisted actively managed exchange traded funds since they came to market five years ago. What will it take to convince pension funds, endowments and other large institutional investors to use active ETFs?

The possibility of front running, or cherry picking, is what concerns institutional investors the most. Ari Weinberg for Pensions & Investments reports that larger investors would have to look at ETFs from a different angle if they are to use active ETFs in their strategies. Currently, ETFs are used by hedge funds and the like for manager transitions and liquidity.

β€œIs there a way to protect portfolio management while providing enough transparency so that market makers can make efficient markets?” asked Michael Mundt, who left the SEC in 2011 after almost 14 years. During his tenure as a regulator, he helped draft the active ETF concept release in 2001 as well as the 2008 ETF rule proposal and oversaw the office approving exemptive relief.

There are about 56 active ETFs trading, and of those, the top four by assets are from the fixed income sector. Actively managed equity ETFs have been a harder sell to both individual and institutional investors, according to the P&I report.

The faster regulatory process that has been suggested by BlackRock to the Securities and Exchange Commission could enhance the active ETF. The ETF manager has suggested that non-transparent ETFs be put on a different path through the approval process.

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