The number of active ETFs employing a new holdings disclosure period, that some refer to as “nontransparent,” is growing, with different providers adopting different models of this opaque structure.
The question is, are they delivering the goods? Good question.
Early indications would suggest that, as a group, they are off to a good start, but that statement comes with some caveats.
First is the issue of track record. They haven’t been around all that long. These ETFs have been on the market just over three months in some cases; some were launched in the past few weeks. They are too new to prove their value proposition.
What’s The Benchmark?
A bigger challenge in assessing their performance, however, is finding the right benchmark for comparisons, said Elisabeth Kashner, director of ETF research at FactSet. In order to know if an active ETF is delivering the goods, you have to know what benchmark to size it up against.
“Most of them are value or growth-oriented, which means that benchmark selection is fraught, given the variability of available methodologies,” Kashner said.
Taking all of that into account, and understanding that the benchmarks used for these performance comparisons are FactSet “Analyst Picks” for each segment whenever available, here’s how these nontransparent active ETFs (in orange) have done so far since inception against the FactSet benchmark (in purple):
There are only two spots of underperformance in this tally. The Fidelity New Millennium ETF (FMIL), which uses the proxy-portfolio structure and discloses holdings every 30 days, has lagged a vanilla total global market benchmark as measured by the Vanguard Total World Stock ETF (VT) since launch.
FMIL is an ETF built for the so-called new economy, investing in global stocks the manager sees as being beneficiaries of long-term changes in the marketplace. These stocks, selected through fundamental analysis, can be growth names or value names, or both.
The Fidelity Blue Chip Value ETF (FBCV), too, has lagged a vanilla benchmark as measured by a broad global large cap ETF, the iShares Global 100 ETF (IOO). FBCV invests in stocks that have strong fundamentals, such as profitability measures, but that are considered undervalued relative to their respective industries.
Again, these benchmark comparisons for these nontransparent funds are merely a yardstick that offers a glimpse into how these funds are performing relative to vanilla passive strategies accessing the same universe of stocks. It’s still early days, and we have yet to see—with a lag—what’s inside these ETFs.
“Short-term ANT [active nontransparent] bets have played out well so far, but ANTs are designed for the long haul,” Kashner added. “It's foolhardy to assess a journey when you haven't yet left the driveway.”
Contact Cinthia Murphy at [email protected]