Are you ready to invest in actively managed exchange-traded funds from the likes of Fidelity Investments, T. Rowe Price and other leading asset managers who’ve made names for themselves in the actively managed mutual fund space? After a yearslong process that involved filing initial applications—and refiling multiple amended applications—with the Securities and Exchange Commission, Fidelity and T. Rowe Price recently got a green light from the regulator to roll out actively managed ETFs that aren’t required to have daily portfolio disclosures like traditional ETFs do.
In one fell swoop, the SEC in late autumn cleared the deck when it approved applications for launching so-called semi-transparent ETFs from those two firms and two other entities—Blue Tractor Group and a joint effort by Natixis Investment Managers and the New York Stock Exchange, both of which had applications before the SEC that were amended multiple times before being approved.
This follows the SEC’s approval this spring of a semi-transparent structure for actively managed ETFs created by Precidian Funds that has been licensed to a gaggle of leading asset managers including BlackRock, Capital Group, J.P. Morgan, Nationwide, Gabelli, Columbia Threadneedle, American Century, Nuveen and Legg Mason.
This is huge for the ETF industry because the market will likely soon be flooded with new actively managed equity products from asset managers who previously were reluctant to put their actively managed investment strategies in an ETF wrapper over fears that showing their portfolios daily would let sophisticated investors front-run their trades and copy their proprietary strategies.
Sure, BlackRock’s iShares unit is already the largest U.S. ETF sponsor, but aside from four active ETFs, the rest of its product suite of roughly 350 ETFs is passive. And some of the other firms mentioned above (including Fidelity) also have ETFs on the market, and a small number of them are actively managed. But all of these firms have actively managed equity strategies in mutual funds they believe could work in the ETF world—provided they can protect their secret sauce.
These asset managers want to take advantage of the benefits offered by the ETF structure in the form of lower costs and greater tax efficiency. They also want to join the ETF revolution because they’re tired of seeing money flow out of their mutual funds and into ETFs, where total assets are roughly $4.3 trillion and rising.
But are investors—and financial advisors—jonesing for actively managed ETFs with limited transparency? And do investors even care about transparency? After all, they invest trillions of dollars in mutual funds with limited—usually quarterly—portfolio disclosures.
As noted in an industry alert from the law firm Ropes & Gray, these semi-transparent models employ various methods to create “proxy portfolios” where there’s some transparency for ETF holdings and baskets available to authorized participants and other market participants responsible for setting prices for these securities.
“Broadly speaking, they’re all designed to protect some portfolio information while providing transparency through other mechanisms,” says Brian McCabe, who follows the ETF space as asset management partner at Ropes & Gray. He adds that ETF transparency likely matters much more to the ETF industry than to investors.
But that takes us back to the question of whether investors want actively managed ETFs. After all, the growing preference for passive management has fueled the ETF industry’s massive growth during the past quarter century. This growth was powered both by the cheaper expense fees typically offered by ETFs, along with the growing perception that active managers on the whole consistently underperform their bogeys.