Liquid Alternatives: Non-transparent ETFs Could Move Mutual Funds’ Cheese
As if the competition from ETFs was not enough, a new breed of non-transparent ETFs is encroaching into mutual fund territory.
American Century’s actively managed, non-transparent ETFs started trading earlier this month. American Century Focused Dynamic Growth ETF (BATS: FDG) and American Century Focused Large-Cap Value ETF (BATS: FLV) will not disclose their holdings daily. In this respect, they are more like mutual funds, and less like most ETFs – which disclose daily. Should mutual funds worry? (CNBC)
Mutual funds: Who moved my cheese?
Non-transparent ETFs are perhaps making life even more difficult for active managers of mutual funds. With their cheaper fee structure, ETFs have already cornered a massive chunk of investors’ funds. Investors also prefer ETFs for their better liquidity compared to mutual funds. Note that while ETFs can be bought or sold daily, mutual funds can only be transacted at fixed times.
According to John Davi, founder, and chief investment officer of Astoria Portfolio Advisors, ETFs have also proved themselves as excellent price discovery vehicles. With this new-found added advantage of ETFs, Davi thinks the mutual fund industry is in trouble.
Ed Rosenberg, head of ETFs and senior vice president at American Century, makes the point that fee wars and commission cuts will eventually bring mutual funds on par with ETFs on fees. At such point, however, the inherent advantages of ETFs will prevail, and mutual funds can do nothing about that.
Mutual fund industry should watch out
Declining price-to-earnings ratios at mutual fund companies show that the industry is already under pressure. Non-transparent ETFs may only make the situation worse.
According to Davi, the market is hinting to the mutual fund industry that it needs to get its act together and become more ETF-like.
‘Hey, you need to get on the ball here and get involved in the ETF ecosystem in one shape or form,’ says Davi, “and ANTs is one way to do it.”
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