Non-Transparent Actively Managed ETFs Could Be the Next Frontier

More money managers are looking into the actively managed exchange traded fund space in a bid to expand their reach after the Securities and Exchange Commission gave the go-ahead for non-transparent offerings.

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.

“These ETFs don’t publish their holdings daily. It’s a simple case of managers not wanting to give their tactics away,” Ciaran Fitzpatrick, Head of ETF Servicing Europe at fund manager State Street, told the Financial Times. “The funds help those managers who get alpha from how they weight their portfolios but in an ETF wrapper, which includes lower costs and tax benefits. It’s a great way to target investors.”

However, others have some misgivings as ETFs have been long touted for their highly transparent nature.

“These products are not exactly what people expect from ETFs at the moment. We are still in the mindset of transparency being a key component for investors,” Howie Li, head of ETFs at Legal & General Investment Management, told FT.

“It [lack of transparency]is a concern the SEC and I share, and one that’s grown in recent days as even fully transparent ETFs — active and passive alike — have in some instances seen unprecedented price dislocations,” Ben Johnson, director of global ETF research at Morningstar, told FT.

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.

“We are now seeing active managers wanting in on the ETF story and this is sometimes perceived by them as a great distribution opportunity,” Li added.

The SEC has given exemptive relief for several non-transparent ETF structures, including those from Fidelity; T Rowe Price; Blue Tractor group’s ETF, which it hopes to launch at the end of the year; and Precidian’s proprietary ActiveShares model.

“The transparency is purely a tool for pricing ETFs rather than one that end investors use religiously. It’s clear that, now that the passive battle has been won by ETFs, the natural development of the ETF market means that the active world is the next ‘frontier’,” Hector McNeil, Co-Founder and Chief Executive of Investment Platform HanETF, told FT.

For more information on active ETFs, visit our actively managed ETFs category.