Ready or not, mutual funds, active ETFs set to take off

Transparency a minor issue, says RevenueShares' Vince Lowry

By Jeff Benjamin

Apr 22, 2014 @ 12:01 am (Updated 3:01 pm) EST

Active ETFs, mutual funds, net asset value, transparent portfolios, intraday trading

Vince Lowry believes the active exchange-traded-fund market is going to burst wide open in the next few years, whether the traditional mutual fund industry wants to participate or not.

Regarding the major sticking point of the requirement for fully transparent portfolios, the chief executive of RevenueShares calls out the mutual fund industry for protecting its more profitable turf.

“I personally believe the issue of transparent portfolios [for active ETFs] is not as big a problem as the fund companies want you to think it is,” he said. “The real issue is the active mutual fund managers will have to cut their fees in half if they start offering active ETFs.”

RevenueShares, a division of VTL Associates, oversees $14 billion in nondiscretionary asset for institutional investors and manages another $2.1 billion in exchange-traded funds.

Mr. Lowry offers a candid take on the simmering debate over whether regulators should allow fund companies to offer actively managed ETFs that don't include fully transparent portfolio holdings.

InvestmentNews: Why aren't more mutual fund companies launching actively managed ETFs?

Mr. Lowry: I think the portfolio transparency is a major issue for the portfolio managers and the management at the fund companies.

But there's another concern that once they come into the active ETF arena, I think some of the companies see it may just drain money off their mutual funds and cannibalize them instead of giving them the growth they're looking for.

Offering active ETFs could also really disrupt the sales force, which now sells mutual funds, probably for a higher fee base.

InvestmentNews: So what do you make of the portfolio transparency argument that is being put forth by a lot of mutual fund companies?

Mr. Lowry: I don't think it's a legitimate concern at all. I think it's a smokescreen. Everything comes down to money. They might not be growing, but they're still holding strong. Mutual funds are highly profitable. If they get into the ETF arena with similar funds that they've built a whole business on, the sales force doesn't want it to happen because they would make less money and the company profits will also fall.

InvestmentNews: Do you think the Securities and Exchange Commission will allow some form of nontransparent active ETF portfolio eventually?

Mr. Lowry: Yes, I think they will. I think a lot of people are looking at the SEC as the group that's blocking it. But there are also more pragmatic reasons. The real problem is, if you're going to have a nontransparent ETF, how will you create the indicative value that flashes every 15 seconds across the screens? Somebody has to know the portfolio's net asset value.

I think the SEC is worried about the same thing that everybody else is worried about. How do you establish an accurate net asset value if you don't know what's in that portfolio?

InvestmentNews: What are the plans for entering the active ETF space at RevenueShares?

Mr. Lowry: We're looking at something on an international basis. It will be a strategy that is revenue-weighted by company, by GDP, and then by country. It will be fairly active.

We're going to keep that portfolio transparent; we're not seeking a nontransparency exemption.

InvestmentNews: What is your longer-term outlook for the active ETF space?

Mr. Lowry: I think it's going to break open, and I think it could break in the next year or two, where the fund companies are not going to jump into it themselves, but they will probably start to team up with existing players in the ETF space.

How that plays out will then determine when the big fund companies will start to really get into the game and start to replicate some of their funds.

Once that happens, it will then morph into seeing more traditional types of equity mutual fund strategies move into active ETFs.