Why non-transparent ETFs could change the face of active management


A new era of ETFs has arrived.

The Securities and Exchange Commission has begun granting preliminary approvals for non-transparent exchange-traded funds, a move that could change the face of active investing, according to the best minds in the industry.

T. Rowe Price, Natixis, Fidelity and Blue Tractor were the first asset management firms to gain preliminary approval for their ETFs. The new structure will allow them to manage their funds without disclosing their holdings on a daily basis, but rather on a quarterly basis, avoiding a common concern among active managers to be at the forefront of their strategies.

This development follows years of underperformance by active funds. As of June 30, only 21% of large actively managed funds had outperformed the S&P 500 in the past five years, according to SPIVA, the “S&P Indices Versus Active” data collection project operated by S&P Dow Jones Indices. The rest – nearly 79% – couldn’t beat the benchmark average.

“[Of] large-cap funds, only one in three of these actively managed large-cap funds outperformed [the S&P] on a three-year basis,” Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, said Monday on CNBC’s “ETF Edge.”

“If you hit one in three players in baseball, you’d be in an all-star game. If you do it in a world of mutual funds, you see money flowing to ETFs. This trend is going to continue,” a Rosenbluth said. “The fees are still too high for active management. They have a hard time basing it on performance because of these high fees.”

Because the added cost of running an actively managed mutual fund can seriously affect its sustainability, the opportunity to enter the ETF space and offer active strategies on the cheap is a manager that is unlikely to let pass, said Tom Lydon, editor and owner of ETFTrends. .com.

“We have a lot of catching up to do” on the active management front, Lydon said in the same “ETF Edge” interview. “We’ve had a 10 year bull market. Passive has been on top. Will it ever revert to the mean where asset is coming back? If so and these companies are betting on it in this wrapper ETF , especially because they have a lot of money for marketing, I think there is a way for them to get streams.”

It will all come down to choice, Lydon said, echoing an idea put forward in the same interview by Invesco’s Dan Draper, the company’s global head of ETFs.

“When you look at the $8.6 trillion that’s in equity mutual funds, we know $4.6 trillion is passive, $4 trillion is active,” Lydon said. “There’s a lot of money, there’s a lot of shareholders, and there’s a lot of long-term relationships out there where these companies like T. Rowe Price, like Fidelity, want to say, ‘Hey, we’ll give you that in a mutual fund format or an ETF format.'”

Draper added that based on his experience at a major ETF issuer, the asset-liability battle is not as one-sided as some might think.

“At Invesco, we find that most of our clients, and certainly new ones, buy passive, but also active,” he said during the Monday interview. “So I think the shake-up continues. These hidden indexers that charge active prices, that’s what’s really shaken up right now. But true active stock picking is going to be with us in some form or another for long time.”

That’s why Invesco will continue to offer different types to its clients, largely regardless of demand, Draper said.

“Our approach at Invesco is to offer all different types of potential solutions to clients. So I would say in today’s world, are we seeing huge pent-up demand? Probably not today, but I think that the potential to take the best of actively managed stock selection [and put] sometimes in more tax-efficient, potentially lower-cost packaging as well, I think for some customers that could really make sense,” he said.

“Specifically here, the approvals [are] coming first for US equities,” Draper said. “But the potential for other asset classes like non-transparent fixed-income assets [management is there]. So it’s a very important development, but I think the education and deployment will take time.”


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