Goldman, Fidelity, Gabelli put new spin on semi-transparent ETFs

The asset management industry's push of the unique wrapper could be a tough sell with advisers

So far, the much-anticipated flood of new semi-transparent ETFs has not lived up to expectations in 2020, but recent developments prove that the asset management industry has stayed busy behind the scenes to get this unique fund wrapper ready for prime time.

In addition to Friday’s registration by Gabelli Funds for nine exchange-traded funds that will limit the reporting of portfolio holdings, Goldman Sachs announced Monday an agreement to license semi-transparent ETF technology from Fidelity Investments.

The asset management industry, which entered the year with bold plans for semi-transparent ETF launches, has been downplaying the impact of the economic downturn and market correction that was triggered by the COVID-19 global pandemic.

But if fallout from the coronavirus isn’t holding up the much hyped wave of semi-transparent ETFs, what is?

To date, only American Century has come to market with a version of the ETF that trades throughout the day but limits portfolio reporting transparency to about once a month, like a traditional mutual fund.

“The last thing they would want to do was to launch right into the heart of the volatility in March,” said Morningstar analyst Ben Johnson.

“But at the end of the day, whatever you call these new funds, it’s still active management, and active management has not been popular,” he said.

One might assume the active management camp would relish the kind of opportunity that has been presented this year, with a market peak in February, followed by a steep 30% drop to late March, followed by a 30% rally that has left the S&P 500 down about 9% in 2020.

But these are extraordinary times, and the asset management industry might not be ready to try and convince financial advisers to start introducing their clients to something that’s also extraordinary right now.

As road tests go, the two American Century funds have produced mixed results since their April 2 debut, near perfectly timed just 10 days off the stock market’s March 23 trough.

While Morningstar reports no new money has gone into either fund since April 23, the $10.3 million American Century Focused Dynamic Growth (FDG) has gained 30.9% from its launch, while the $13.8 million American Century Focused Large Cap Value (FLV) is up 11%.

The S&P 500 rose 16.3% over the same period.

In its press release, Goldman Sachs Asset Management touted its commitment to “remaining at the forefront of innovation for its ETF product,” adding that the agreement with Fidelity “furthers this goal.”

Goldman Sachs is clearly covering all the bases by originally licensing with Precidian Investments and then licensing with Fidelity, which is one of four firms that is using a proxy basket of securities to give market makers a sense of what a semi-transparent fund holds without publicizing the portfolio holdings.

Precidian, which is the model Gabelli is licensing, uses a blind trust model to help market makers gauge the value of the portfolio holdings.

Todd Rosenbluth, director of ETF and mutual fund research at CFRA, views the Gabelli filing as another endorsement of the semi-transparent strategy.

“Gabelli has a strong brand within the wealth management space to leverage but it will require educational efforts on the merits of these funds,” he said.

That might be an understatement considering what seems to be a considerable chasm between what the asset management industry wants financial advisers to embrace and how little financial advisers are showing in these nuanced versions of actively managed products.

For example, a February survey of 571 advisers who custody at TD Ameritrade showed that 92% of respondents said they will not allocate client assets to semi-transparent ETFs.

Meanwhile, the asset management industry that has been watching active management lose ground to passive strategies for more than a decade remains oddly steadfast.

“We think our model is the cleanest, and it looks and acts like an ETF,” said Greg Friedman, Fidelity’s head of ETF management and strategy.

“All four models will work, will perform fine, and are good reputable institutions,” he added. “The differential is who we are, Fidelity.”

Fidelity, which has three semi-transparent ETFs of its own meandering somewhere along in the registration process, isn’t yet tipping its hand as to when those funds might hit the market.

“We’re still hoping for sooner rather than later,” Friedman said. “And we’re still on the same timeline we were on before the world changed.”

Noah Hamman, chief executive of AdvisorShares, believes it will take time and the hefty influence of the largest firms in the asset-management industry to push semi-transparent ETFs onto the radar screens of financial advisers.

“We’re seeing interest, but there are big issues related to the limitations of the funds,” he said, referencing things like only being able to trade domestic securities and only when the U.S. markets are open.

“Just like the first active ETFs and the first-ever ETF, it will be slow, but the biggest firms need to navigate the distribution process in this environment, and get their marketing and salespeople around it,” Hamman said.

AdvisorShares, which manages $705 million across 15 actively managed ETFs, has not yet filed for a semi-transparent version. But there are plans to do so.

“Our plan was to have some products on the market, but the beginning of the year slowed things down,” Hamman said. “We haven’t filed yet, but it’s reasonable to say by end of this year or the first quarter of next year we’ll have something trading in a semi-transparent structure.”