By Grant Engelbart, CFA, CAIA – Senior Portfolio Manager
Just what the world needs, more acronyms. While there isn’t yet an industry-agreed upon term, the active non-transparent (ANT) ETF structure is fresh and new. Non-transparent Active (NTA) might flow better, but it’s not as fun. Either way, the ETF industry has been waiting for some time for the launch of these specific type of ETF after the launch of the Exchange-Traded Managed Fund (ETMF) to limited success in 2014. Let’s look at why or why not these could be game changers in the industry (ETF 2.0 as some call it) and then examine the current structures and products.
The idea behind the non-transparent active ETF is fairly simple at a high level – soothe active managers worries about front-running and full transparency while still taking advantage of the benefits of the ETF structure. The hiding, scrambling, and delaying of those holdings is where the different proposed and approved structures come in. It seems as though many of the large active mutual fund managers are interested and learning and some are launching products in this space – which is great.
What are the benefits? The first, to me, is what I just mentioned – the lack of transparency that brings more top equity active managers to the ETF structure. From a structural standpoint, the tax savings could be substantial. As we know, ETFs are able to limit capital gains payouts due to the creation/redemption mechanism. Cost is another major benefit as many legacy active mutual funds can have fees well in excess of most ETFs, the ANT structure likely brings that down. However, there are many active mutual funds with institutional or retirement share classes with fees that do near those of many ETFs. Finally, the ability to transact intraday is a benefit of the structure, to some. I’m not sure if that’s all that important to long-term investors, but if that tradability helps the creation/redemption mechanism to work then it’s worth it for tax reasons.
It can’t all be good, right? There have to be drawbacks, and right now there are. First off there is no standardized structure or playbook, as there are several approved structures. Will one win out? Due to the way many of these products work, they need to disseminate a value every few seconds, therefore the underlying securities need to trade during the U.S. market hours. This limits the universe to mostly U.S. equities and Treasuries. One of the benefits of ETFs is access and liquidity brought to illiquid and hard to access asset classes. I’m sure someone will figure this out, but in the meantime, it doesn’t make these ANTs overwhelmingly exciting. After all, there has been evidence that active management brings more value to less covered and less liquid asset classes – those that aren’t eligible to be part of the structure, at least initially. The last worry I have is regarding trading. Each structure has little nuances that make it more difficult for market makers to be competitive with one another and benefit investors. You can see the early look at bid/ask spreads in the chart below. Also – this interaction between the fund and trading firms is vital to the tax efficiency of an ETF. If there’s any doubt that these active non-transparent ETFs can’t reduce the hefty tax bill that active managers have been sending to investors for years, they definitely lose a critical benefit.
Let’s take a look at the structures with products currently trading. It’s too early to make rash judgements about each, but definitely worth monitoring. We won’t go into the nuances between structures here, but feel free to click the links under “ANT type” to learn more.
| Non/Semi-Transparent ETFs | Ticker | ANT Type | Net Assets | Morningstar Category | Average Spread | Excess Return vs Category (Inception) | Total Ret Inception (12/31/20) | Inception Date |
| American Century Foc Dynmc Gr ETF | FDG | Precidian | $ 216,853,387 | Large Growth | 0.13% | 27.9% | 85.9% | 3/31/2020 |
| American Century Foc Lrg Cp Val ETF | FLV | Precidian | $ 173,590,490 | Large Value | 0.17% | -0.8% | 37.1% | 3/31/2020 |
| American Century Mid Cap Growth Imp ETF | MID | NYSE | $ 7,790,034 | Mid-Cap Growth | 0.16% | 0.4% | 30.5% | 7/15/2020 |
| American Century Sustainable Equity ETF | ESGA | NYSE | $ 111,097,828 | Large Blend | 0.16% | -1.4% | 17.3% | 7/15/2020 |
| Clearbridge Focus Value ETF | CFCV | Precidian | $ 3,164,032 | Large Value | 0.27% | -1.4% | 22.4% | 5/27/2020 |
| Fidelity® Blue Chip Growth ETF | FBCG | Fidelity | $ 196,680,491 | Large Growth | 0.19% | 13.1% | 42.8% | 6/2/2020 |
| Fidelity® Blue Chip Value ETF | FBCV | Fidelity | $ 43,840,329 | Large Value | 0.18% | -0.4% | 21.0% | 6/2/2020 |
| Fidelity® New Millennium ETF | FMIL | Fidelity | $ 23,159,590 | Large Blend | 0.24% | -1.8% | 22.2% | 6/2/2020 |
| Natixis U.S. Equity Opportunities ETF | EQOP | NYSE | $ 11,959,392 | Large Blend | 0.13% | 3.4% | 14.8% | 9/16/2020 |
| Natixis Vaughan Nelson Mid Cap ETF | VNMC | NYSE | $ 8,029,391 | Mid-Cap Blend | 0.17% | -2.1% | 19.5% | 9/16/2020 |
| Natixis Vaughan Nelson Select ETF | VNSE | NYSE | $ 6,102,116 | Large Blend | 0.15% | -1.7% | 9.7% | 9/16/2020 |
| T. Rowe Price Blue Chip Growth ETF | TCHP | T. Rowe | $ 66,554,739 | Large Growth | 0.15% | -3.6% | 12.3% | 8/4/2020 |
| T. Rowe Price Dividend Growth ETF | TDVG | T. Rowe | $ 37,506,019 | Large Blend | 0.09% | -1.6% | 13.5% | 8/4/2020 |
| T. Rowe Price Equity Income ETF | TEQI | T. Rowe | $ 24,526,951 | Large Value | 0.15% | 1.8% | 19.0% | 8/4/2020 |
| T. Rowe Price Growth Stock ETF | TGRW | T. Rowe | $ 26,232,720 | Large Growth | 0.12% | 1.0% | 16.8% | 8/4/2020 |
| ETMFs | ||||||||
| Eaton Vance Global Income Builder NS™ | EVGBC | ETMF | $ 6,664,764 | World Allocation | 0.22% | 1.5% | 9.5% | 3/30/2016 |
| Eaton Vance Stock NextShares™ | EVSTC | ETMF | $ 7,528,707 | Large Blend | 0.17% | 1.0% | 16.8% | 2/25/2016 |
| Eaton Vance TABS 5to15Yr Ldrd MuniBd NS™ | EVLMC | ETMF | $ 7,607,333 | Muni National Interm | 0.21% | 0.7% | 3.8% | 3/30/2016 |
ETFs have had an amazing year of inflows – capturing more than $500 Billion of assets – a lot of that coming from traditional mutual funds. Active Non-transparent ETFs captured nearly $1 Billion, not too shabby for only a few months of a new structure in the marketplace – but still a long way to go to fully displace and disrupt active mutual funds. New transparent entrants into the active ETF world have also thrown a wrench into the equation. Dimensional Fund Advisors (DFA) converted several of their tax-efficient mutual funds to ETFs, and transparent, concentrated, active funds managed by ARK Invest have taken the fund world by storm with incredible 2020 returns and massive inflows. No matter how you slice it, the future is bright for ETFs, and its exciting to be part of. Here’s to improving investor outcomes even more in 2021.
Disclosure
This information is prepared for general information only. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. The graphs and charts contained in this work are for informational purposes only. No graph or chart should be regarded as a guide to investing. 0063-OAS-01/11/2021