JPMorgan’s J.P. Morgan Investment Management Inc. is the latest big name from the financial services space to jump into the race for actively managed non-transparent equity ETFs.
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.
J.P. Morgan Investment Management filed plans for the JPMorgan Large Cap Growth ETF, which is expected to be an alternative to traditional passively managed Russell 1000 Growth Index strategies.
“The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance,” according to the filing.
There are other important differences between non-transparent active ETFs and their traditional passive rivals.
“Unlike other actively managed ETFs, the Fund does not publicly disclose the composition of its portfolio each business day, which may affect the price at which Shares of the Fund trade in the secondary market,” said JPMorgan in its filing. “The Fund instead discloses the Fund’s strategy, the types of securities the Fund intends to invest in and publishes each business day a verified intraday indicative value (VIIV) on a per share basis in one second intervals during regular trading hours on the Exchange. The VIIV is intended to provide investors and other market participants with a highly correlated per share value of the underlying portfolio that can be compared to the current market price.”
Big Mutual Opportunity
With about $8.6 trillion in assets residing in mutual funds and close to half of that allocated to actively managed products, there’s a potentially massive opportunity for mutual fund issuers looking to enhance or establish ETF footprints by using the active non-transparent structure.
The Securities and Exchange Commission recently approved the actively managed non-transparent ETF structure through the Precidian ActiveShares exempt relief filing in June 2019, allowing fund managers to disclose holdings on a quarterly basis or ultimately keeping holdings more confidential than with traditional transparent ETFs. This is seen as a way for active fund managers to better guard their secret sauce against front runners or would-be investors that would take advantage of an active fund manager’s investment methodology.
However, the Broadridge survey also revealed that many financial advisors still exhibit a low level of awareness of the newly approved ActiveShares ETF structure, but they find the concept and definition of active non-transparent ETFs appealing. According to the findings, only 4% of advisors said they were “very familiar” with ActiveShares while 37% of respondents were entirely not aware and another 37% have heard of the name but know nothing about the technology.
JPMorgan’s filing doesn’t feature a debut date for the large-cap growth fund.
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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.