Can nontransparent ETFs save active management?

Can nontransparent ETFs save active management?
Asset managers have high hopes for the new type of wrapper, expected to hit the market in the next few weeks
JAN 28, 2020

With the first nontransparent exchange-traded funds expected to hit the market in the next few weeks, some of the biggest proponents of the unique new fund wrapper were on hand at the Inside ETF conference in Hollywood, Fla., to provide some perspective for financial advisers.

“This is allowing the mutual fund market to come to the exchange-traded market, and there’s a lot of momentum moving in this direction,” said Daniel McCade, chief executive of Precidian Investments, one of several firms that has a form of nontransparent ETF strategy in the works.

After nearly a decade of wrangling between asset managers and regulators, the market will soon be peppered with actively managed ETFs that will not provide investors with a daily look at the underlying holdings.

In some ways, nontransparent ETFs represent a lifeline for actively managed mutual fund companies that have resisted launching active ETFs for fear of making public their portfolio managers’ investments.

Mutual funds, which suffered $94 billion in net outflows last year, have been losing ground to ETFs for a decade.

The new nontransparent ETF wrapper will, at least in theory, enable mutual fund managers to tap into the increasingly popular ETF space, promoting such ETF characteristics as trading throughout the day and tax efficiency. That will give them an edge over mutual funds, which only trade once a day and can have embedded tax consequences.

Where nontransparent ETFs will likely fall short when compared to other ETFs is in the lack of live transparency on the underlying fund holdings and in their fees, which will need to be in line with the fees on any mutual fund they clone, assuming they are cloning an existing strategy.

Greg Friedman, head of ETF management and strategy at Fidelity Investments, recognizing the unique characteristics of nontransparent ETFs combined with investor preferences, doesn’t believe their advent will mark the death of the mutual fund, but he does believe there will be changes to the distribution ecosystem.

“It will be interesting for asset managers who want to take their strategies and make them wrapper-agnostic,” Mr. Friedman said. “There are different types of clients, and it’s our duty as asset managers to provide a variety of products.”

The move toward nontransparent ETFs, which are also referred to as semitransparent ETFs or active ETFs by different asset managers, is still mostly being driven by a push by product providers rather than demand from investors and financial advisers.

In addition to giving funds a boost when it comes to competing for ETF investors, adding an ETF wrapper around a mutual fund strategy expands the market of potential investors to anyone who has access to a brokerage account on an exchange.

That has global implications, said Douglas Yones, head of exchange traded products at the New York Stock Exchange.

Mr. Yones also pointed out that even if the fees on a nontransparent ETF are the same as the fees on the mutual fund it was cloned from, the tax advantages could be enough to trigger the fiduciary responsibility of a financial adviser to move a client from the mutual fund to the nontransparent ETF.

 “Reg BI is not going away, so advisers will have to compare the structures,” he said.

Latest News

RIA moves: RWA Wealth Partners strengthens leadership as $8B Procyon widens Northeast footprint
RIA moves: RWA Wealth Partners strengthens leadership as $8B Procyon widens Northeast footprint

The Dynasty Financial partner firm's latest deal in Connecticut adds roughly $600 million in client assets.

Cetera names Richard Vogel to lead Cetera Advisors community
Cetera names Richard Vogel to lead Cetera Advisors community

The giant broker dealer and RIA overseeing roughly $800 billion in AUM and AUA has appointed a Merrill and BofA alum to support advisor growth.

Robinhood in talks with regulators over tokenized US equities
Robinhood in talks with regulators over tokenized US equities

Firm's CEO is confident SEC can approve without legislation.

Five-person Raymond James team jumps to Janney in Maryland
Five-person Raymond James team jumps to Janney in Maryland

The group led by a 37-year industry veteran brings $470 million in assets to the Philadelphia-based broker dealer.

$20B Merit looks to next phase as Constellation takes minority stake
$20B Merit looks to next phase as Constellation takes minority stake

The Atlanta, Georgia-based national wealth firm revealed its new PE partner as prior backers Wealth Partners Capital Group and HGGC's Aspire Holdings exited their investments.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.