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 Fuhr: Nontransparent ETFs Don

Fuhr: Nontransparent ETFs Don't Mean Alpha


There are a number of trends brewing in the booming ETF market, and perhaps the most noteworthy is the number of providers looking to take the transparent ETF wrapper back into a black-box format, ETFGI’s founder Deborah Fuhr said.

In a recent interview with’s Cinthia Murphy, Fuhr noted that there’s big development in a number of realms, including nontransparent active ETFs, smart beta and active ETFs in general, with the idea that investors can find alpha through passive asset allocation. Understanding these trends is knowing where the $1.7 trillion industry is headed. But let’s not forget that at the heart of it all is regulation, and what the Securities and Exchange Commission will do next is anyone’s guess. What are some of the major developments or themes you see in the ETF industry today?

Deborah Fuhr: Clearly, what’s interesting from a U.S. perspective is what’s happening in the nontransparent active space. There is a lot of interest in that Eaton Vance product; we’ve seen amended filings recently, and we also saw the New York Stock Exchange file to be able to trade nontransparent products. Some of the other providers who are going to be doing nontransparent ETFs are also making additional filings.

It all seems to be moving forward. Whether it gets approval to come to market is a question, but there seems to be a lot of discussion and interest, and a lot more activity on this front today, when you think that some of these products were filed as long as six years ago. I think that’s interesting.

Beyond that, Charles Schwab working on a 401(k) platform for ETFs is also interesting, because that’s a large asset pool that currently isn’t tapped into by ETFs. Many see that pool of trillions of dollars sitting there as an interesting and appealing proposition for ETFs, especially since the Department of Labor has required that there be more transparency around costs, fees and investment products. What do you think about the nontransparent ETFs? It seems counterintuitive to think that innovation would be to go back to a black-box format. Is that a sort of compromise with active managers who want to enter the ETF market?

Fuhr: That's a good point. Just because something is an active ETF doesn’t necessarily mean you’re going to get alpha. That’s the challenge we keep going back to: Active funds find it difficult to consistently deliver alpha.

If you look at most asset classes and segments of the market, you generally find that six or seven out of 10 managers are not generating alpha, and the ability to do it consistently is a challenge. Active managers don’t want to provide daily transparency on what they own, especially in the equity space, because they’re afraid people will follow them, or they’ll front-run. They’d be giving away their secret sauce.

But they see ETFs as a new form of distribution. Given the success traditional index-based ETFs have had in terms of fast growth—and the fact that we’ve seen significantly more net new assets go into ETFs than traditional mutual funds over the past five years—that’s one of the things that’s appealing to traditional active managers. It’s a major distribution channel.

If you look at the Eaton Vance proposal [for exchange-traded managed funds], they’re proposing an idea of NAV plus pricing. It’s a different model than a traditional ETF. What they say is that by listing an active fund on an exchange, it will save about 50 basis points of cost and administrative fees. The idea is that if many active funds, after costs, don’t deliver alpha, they would be delivering alpha if costs were lower.

The Eaton Vance proposal is different than the other nontransparent ETFs, but it still raises the important question, Do you believe the fund is going to deliver alpha going forward? Because historic performance is no guarantee of future performance, I think that question would be one you’d need to look at before you made a decision to invest.




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