But parting the manager wizard's curtain on a daily basis could be a problem for certain types of funds, such as one that invests in the illiquid issues of smaller companies in which case a manager may need several weeks to build a position. In the meantime, front-runners could step in and try to exploit publicly disseminated strategies. Investors could piggyback on a smart ETF manager's moves by replicating a portfolio, as could a fund's competitors.

"I can see all sorts of shenanigans," says Wharton finance professor Marshall E. Blume. Since the holdings would have to be disclosed to institutional shareholders frequently, they would be in a position to game the system. "So anyone with knowledge of what's in the fund has to be barred from trading in ways that are detrimental to the ETF," he cautions.

The future of actively managed ETFs rests on the resolution of transparency issues, investor acceptance of these portfolios and, of course, how the new entrants to the market perform. ETF consultant Gary Gastineau believes that while there is an enormous scope for active ETFs, there has to be less transparency before that can happen. "I've had a number of conversations with fund companies, and their reactions are all over the map on this. On the one hand they seem interested in an alternative to the existing mutual fund structure. But they also want some assurance that managers can trade in confidence," he says.

Stacy Fuller, an attorney with Kirkpatrick & Lockhart Preston Gates Ellis, also observes that many fund companies "perceive transparency as a hurdle." Some solutions to the problem, she says, might include disclosing only a portion of the portfolio, or disclosing a "proxy portfolio" to the public that is representative of what the fund holds without revealing the actual securities.

Fuller believes that the market has enormous potential for growth, and that financial advisors who subscribe to the benefits of actively managed mutual funds for all or part of their client portfolios will be the first to embrace actively managed ETFs. "The question that actively managed ETFs will need to answer is whether, given the need for portfolio transparency, they can develop into an alternative to the traditional mutual fund across the various asset classes, particularly those in less liquid markets."

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