Liquid Alternatives: Semi-transparent ETFs Get Advisor Love

March 27, 2020 | Liquid Alternatives, News

A rising number of advisors are looking to buy non- or semi-transparent ETFs during the coming 12 months.

Assets under actively managed ETFs constituted a minuscule percentage (< 3%) of total ETF assets ($4.4 trillion) as of end-2019. The most commonly attributed reason for this phenomenon is the fear that active managers face regarding their “secret sauce.” They are loath to make full daily disclosure of holdings as required by regulations for ETFs, as other fund managers and traders could copy their strategies. However, a new breed of “non-transparent” ETFs that “mask” some or all of the fund’s portfolio, may soon become reality.

These may be great for fund managers, but what about advisors and investors? Certainly, there is evidence of rising advisor interest in non-transparent ETFs. (ETF TRENDS)

Non-transparent ETFs’ coming out party in 2020?

“Over eight out of every ten advisors have an interest in buying a semi-transparent ETF over the next 12 months,” said Rick Genoni. He is Managing Director, Head of ETFs, Legg Mason (NYSE: LM). He was speaking at the Inside ETFs conference recently.

Further, at the same conference, Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, highlighted non-transparent ETFs as one of the top four themes driving the ETF industry this year. He expects some of the big names in the asset management industry to enter the new strategy.

“T. Rowe Price, which does not exist in the ETF world, has $170 billion of actively managed mutual fund strategies where there will be an ETF version … coming in 2020,” Rosenbluth said.

“There’s a whole lot of firms that have strong brand names that have a record of outperformance and modest fees for active management that are coming out.”

Longer-term trends

Kip Meadows, founder and CEO of Nottingham, a fund administration firm drew attention to the large fund flows departing actively managed open-end mutual funds and heading for lower-cost passive index ETFs.

“Actively managed non-transparent ETFs should dramatically shift that balance over the next few years,” Meadows predicted. Most observers are expecting actively managed ETFs to outpace new filings for passive ETFs, he added.

However, that trend could be accentuated by another, more demographic one. Retirement funds will soon have larger components of younger savers. These investors would like real-time updates regarding their portfolios. That’s something possible with ETFs, not open-ended funds that are valued at the end of the trading day.

Precidian: Non-transparent ETFs a pivot point

“We’ve licensed 14 different active managers to date that control about thirteen-and-a-half trillion dollars in assets under management,” says Dan McCabe, CEO, Precidian.

“Frankly, it’s a pivot point in the industry. For the first time in 25 years, active managers are going to have a vehicle, whether it’s ours or somebody else’s. It will allow people to compete head-to-head with the passive ETF space,” he added.

Related Story:  Liquid Alternatives: The Goldman Sachs “Stealth” ETF

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