Nontransparent ETFs Game Changers

November 05, 2013

Transparency and ETFs could one day split paths, opening a new frontier for actively managed ETFs.

When it comes to the future growth of the ETF market, Nigel Brashaw, partner in PwC’s asset management practice, argues that not only innovation but regulation will hold the key to just how quickly expansion will come to the $1.6 trillion ETF space. More specifically, Brashaw says that active management in ETFs could be poised to make a leap if the Securities and Exchange Commission changes ETF transparency rules, allowing a group of nontransparent active ETFs to take off. In a recent research paper titled “ETFs: How innovators and regulators are shaping growth,” PwC estimated that U.S.-based active ETFs alone would grow tenfold in the next five years to $175 billion in total assets, and that nontransparent ETFs, if approved, could really change the face of that market segment. You’ve recently made the argument in a research paper that regulation holds the key to just how quickly the ETF market will expand from here. Why is that?

Nigel Brashaw: There are a couple of things to consider. We’re pretty optimistic about ETFs in a general sense given some of the advantages that the product has. But if you look at ETF growth over the last 10 years or so, yes, it’s huge growth, but it’s really in a specific part of the market: the passive side. When you look at the amount of money that’s invested in active products, that’s really sort of an untapped space. By and large, ETFs really don’t feature on that front.

So, as look into the future, we’re focusing on what the SEC might do around some of the nontransparency issues as they relate to ETFs. Recently, there's been increasing noise in the system around some of the potential solutions to the issue of nontransparency, and that’s something that we see as a potential real game changer for ETFs. That’s because if you have an ETF structure where, from a transparency perspective, there aren't concerns about giving away the methodology, there aren't concerns about front-running, etc., and that would be a huge new potential market for ETFs.

It’s hard to see why you wouldn’t have retail investors or institutional investors taking advantage of the benefits of ETFs such as costs, trading and tax efficiency in the active market as well, so that’s a potential real game changer.



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