Active non-transparent ETFs: More Than Just Shiny New Objects

Active non-transparent ETFs (ANTs) aren’t just the glossy new objects on the fund industry block and nor are these funds just another product. There are distinct benefits that come along with ANTs that could pave the way for long-term adoption and success for this new fund structure.

Asset managers see opportunity in the newly approved non-transparent ETF structure that does not require the fund provider to disclose the daily holdings of their basket of investments.

“All these nontransparent ETFs combine the tax efficiency of ETFs with the capabilities of an actively managed mutual fund, without the disclosure of the managers’ ‘secret sauce,’ to protect against front running and copycats,” reports ThinkAdvisor.

The rise of these non-transparent ETFs, though, should breathe some new air into a stagnant actively managed ETF segment. According to Morningstar data, passive ETFs have accumulated $4.4 trillion in assets under management as of January, but active ETF assets only held $150 billion in assets, compared to assets in active open-ended funds excluding ETFs that amounted to $24 trillion.

A Boost for Active Management

With ANTs, active managers will be allowed to move from a mutual fund to an ETF wrapper, while allowing them to keep their strategies hidden from shareholders. These non-transparent ETFs would move the disclosure of portfolio holdings from a daily event to a quarterly one.

The premise is to offer all the different types of potential solutions to clients. In today’s world, while there isn’t huge pent-up demand, there is the potential to take the very best of active management security selection and utilize a more efficient tax-efficient wrapper at lower costs.

ANTs “provide more disclosure than actively managed mutual funds, which don’t reveal any holdings until usually 60 days after a quarter, and at a lower cost with more tax efficiency. But do investors really care about the reduced disclosure? They are probably more interested in the lower price and tax benefits, if they own mutual funds in taxable accounts,” according to ThinkAdvisor.

Looking at the $8.6 trillion in equity mutual funds, it’s known that $4.6 trillion is passive, $4 trillion is active, and then there’s a lot of long-term relationships there where these companies want to be able to make offers in either a mutual fund or ETF format.

For more on active strategies, visit our Active ETFs Channel.

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.