Can Nontransparent ETFs Save Active Mgmt?

June 13, 2019

“If you’re a mutual fund warehouse, you’re trying to figure out how to grow your business without giving away your secret sauce.”        —Nichole Kramer, Manager of ETFs, ALPS


Most investors know the story by now: Actively managed stock mutual funds have bled investor dollars while ETFs have raked in cash.

A lengthy bull market has helped mask active mutual fund outflows, but fund companies are well aware of what is really going on behind the scenes. They are rightly concerned about the future of mutual funds, which grows bleaker by the day.


Source: ICI


Enter nontransparent ETFs. Years in the making, the Securities and Exchange Commission (SEC) recently approved Precidian’s nontransparent ETF structure, ActiveShares. Some are labeling this the next big thing in ETFs.

According to Precidian CEO Dan McCabe: “For the first time, investors will be able to access actively managed ETFs that do not disclose their holdings on a daily basis, but trade and operate in a similar manner to other ETFs.”

“Other ETFs” refers to traditional ETFs, which are generally required to publicly disclose their security positions every single trading day.1 Mutual funds must only disclose holdings quarterly (and up to 60 days in arrears).

The daily transparency of traditional ETFs has dissuaded mutual fund companies from launching their flagship active equity strategies (think Fidelity Contrafund or American Funds Growth Fund of America) using the traditional ETF wrapper.

Daily Disclosure Concerns

Many active managers view daily disclosure as giving away their “secret sauce,” allowing other market participants to potentially reverse engineer their strategies and erode their “edge.” Fund managers are also concerned trades might be front-run (think high speed traders attempting to jump ahead of a fund manager’s large buy or sell orders, resulting in worse price execution for the manager).

This fear of daily disclosure has been enough to keep many of the largest fund companies from using the transparent wrapper. ActiveShares solves this problem by allowing the same quarterly disclosure as mutual funds, but providing the potential benefits of the ETF investment vehicle. From a mutual fund company’s perspective, it’s the best of both worlds.2


Source:  Brown Brothers Harriman


If you don’t think daily transparency has mattered, consider the brand-name fund companies unwilling to launch their flagship equity strategies in a traditional ETF wrapper: Fidelity, T. Rowe Price, American Funds, Dodge & Cox, Franklin Templeton, Janus Henderson, American Century. As a result, transparent actively managed ETFs are only a sliver of the nearly $4 trillion ETF market—less than 1% (about $12 billion in assets).

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