Dave Nadig director of ETFs at FactSet Research Systems, said that might be changing a little bit.
“We’re seeing active managers, particularly smaller active managers, just willing to throw in the towel and say, ‘You know what? I trust my investment process and I’ll go all in and just show people my portfolio and if they want to chase me, that’s fine,’” Nadig said.
In the world of bonds, he added, three leading fixed-income managers—DoubleLine, Pimco and Fidelity—have exposed their actively managed strategies to investors in the form of their successful ETFs.
“The common thread among the successes we’ve seen so far among active ETFs are known firms, strong managers with strong track records, and fixed income,” said Ben Johnson, Morningstar’s director of global ETF research. “They’re not nearly as worried about showing their hands than equity managers would be.”
Concerns over front running has spawned creative strategies to thwart prying eyes by keeping holdings non-transparent, such as the exchange-traded mutual fund structure from NextShares, which are active funds owned by Eaton Vance that began trading in February. These hybrid products have the low fees and intraday trading of ETFs, but like mutual funds are priced at net asset value just once daily after the market closes. The funds don’t have to disclose their holdings on a daily basis.
The Securities and Exchange Commission has shot down efforts by other companies to bring non-transparent, actively managed exchange-traded products to market. Hougan said he believes that’s not in the best interest of investors.
“I think there should be a hue and cry to push the SEC to approve non-transparent strategies whether or not you think active managers will rise again,” he said. “Investors are losing money and paying additional taxes because they’re forced to buy active only in the mutual fund structure. So the SEC is trading a small potential risk for a daily cost where people are paying huge amounts of money.”