The ETF structure is starting to attract mutual funds as a way to lower overall costs. Due to the the ETF’s share creation and redemption mechanism, ETFs typically have lower fees than mutual funds. According to Morningstar, the average active ETF expense ratio is 0.83%, compared to 1.24% for mutual funds. However, passive ETFs are even cheaper, with an average 0.15% expense ratio.
Money managers, though, are loath to reveal their secret sauce through the ETF’s requirement for daily transparency.
“Managers have a problem with that,” Goldsborough added. “They fear that if they disclose their holdings, there will be front-running and shadowing.”
Some companies, though, like T. Rowe Price, Eaton Vance, State Street, Vanguard and BlackRock have proposed non-transparent active ETFs to sidestep the problem. [Non-Transparent Active ETFs are not a Slam-Dunk]
For more information on active ETFs, visit our actively managed ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own TTFS.