Non-transparent ETFs appeal to active managers — but there’s a hitch

A major regulator’s decision on a new type of ETF could be a shot in the arm to active managers — that is, assuming investors actually show interest in buying it.

The US Securities and Exchange Commission (SEC) recently accepted an application for the creation of non-transparent ETFs, which would not reveal full details about their portfolio holdings. The regulator’s decision on the non-transparent ETF, which is being proposed under the name ActiveShares by Precidian Investments, is expected to come as early as this Friday.

A decision to approve would be of particular interest to active managers as such an ETF would effectively avoid tipping rivals off to its underlying strategy. ThinkAdvisor reported that in a survey of product heads from 35 asset managers conducted by Cerulli Associates, 46% indicated that they would build non-transparent ETF capabilities within a year of an SEC approval of Precidian Investments’ ActiveShares proposal. Among those, 55% expect to launch a non-transparent active equity strategy, and 30% expect to launch one for fixed-income investments.

At the moment, asset managers are either filing applications for their own non-transparent ETF structures or entering into licensing agreements with firms that have ongoing applications.

According to Cerulli, each of the new filings “sits on a spectrum of transparency.” A proposal from Fidelity describes an optimized tracking basket that has similar exposures to securities in the ETF, but with differences in certain securities and weights. Another manager, Blue Tractor, has filed an application for an ETF that reveals all its fund holdings, but scrambles the weights.

At the moment, active strategies represent a minority of the ETF space, and most of them are focused on fixed income. A green light from the SEC could open the floodgates for more active ETF providers and products.

The question is whether there would be enough demand to soak up the new supply. Quoting the Cerulli report, ThinkAdvisor said that “expectations for actively managed ETFs are tempered” and the “tenets that have made ETFs successful — low cost, transparency and passive management — will not apply here.”

Cerulli polled roughly 20 ETF strategists, which it defines as portfolio model providers that use ETFs as their building-block investment products, to gauge their interest in the new type of ETFs. Among those surveyed, 53% said they would not use non-transparent active ETFs, citing their need to model the underlying holdings.

“Nontransparent structures may be able to deliver strategies that investors seek in a more accessible vehicle; however, the lack of transparency is a key trade-off,” Cerulli said. It added that unless these “more complex vehicles [are] significantly less expensive than their traditional fund counterparts,” investors may regard them as “poor alternatives to existing open-end, closed-end and ETF products.”

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