Are Non-Transparent, Actively Managed ETFs Living Up to Expectations?
Five years after the SEC approved non-transparent, actively managed ETFs, these vehicles have faced challenges in gaining traction within the market. Industry insiders suggest that the lack of transparency and differentiation from traditional ETFs have left investors unenthusiastic about these products.
The State of Non-Transparent Actively Managed ETFs
Non-transparent, actively managed ETFs operate differently from regular ETFs by not disclosing their holdings daily. Instead, they report their portfolios on a monthly or quarterly basis, resembling mutual funds more closely. Out of the 70 non-transparent ETFs launched since 2016, only 50 remained in the market as of February 2024. These ETFs collectively hold $5.2 billion in assets, representing less than 1% of the total assets under management for all actively managed ETFs in the United States.
Despite the potential benefits of limited transparency for asset managers in protecting their investment strategies, Bryan Armour from Morningstar suggests that this approach may not benefit investors. The complexities involved in the operation of non-transparent ETFs can be a deterrent for investors looking for clarity in their investment decisions.
Challenges and Limitations
Non-transparent ETFs face challenges in reporting their holdings and lack a standardized method for disclosure. These complexities can lead to confusion among investors and discourage them from investing in these vehicles. Additionally, SEC regulations restrict non-transparent active ETFs to U.S. exchange-traded securities, limiting their ability to leverage active management strategies effectively.
Lara Crigger from VettaFi highlights that the SEC’s guidelines limit the tools available to active managers, reducing the differentiation these products offer compared to traditional ETFs. The restrictions on investment choices may hinder the potential for outsized returns that active management strategies aim to achieve.
The Impact on Investor Confidence
Investors, like Steve O. Oniya from OM Investments, value transparency in understanding their investments. The lack of visibility into non-transparent ETFs can create discomfort and limit accountability in managing investments effectively. Oniya suggests that disclosing key holdings periodically could address these concerns and make non-transparent ETFs more appealing to cautious investors.
Comparing Transparent and Non-Transparent ETFs
Crigger points out the preference for transparent ETFs over non-transparent ones, as seen in T. Rowe Price’s offerings. While the non-transparent Blue Chip Growth ETF (TCHP) has shown strong performance, investors have favored the transparent Capital Appreciation Equity ETF (TCAF) due to its clearer investment approach and growth in net assets.
The Road Ahead for Non-Transparent ETFs
The lack of transparency in non-transparent ETFs may pose challenges for inclusion in model portfolios managed by RIAs. Understanding the impact on risk and return calculations and the potential for over-concentration in specific stocks or sectors are crucial considerations for including these products. Crigger emphasizes that gaining traction in model portfolios can significantly impact the success of non-transparent ETFs in attracting investor assets.
Overall, the future of non-transparent, actively managed ETFs hinges on addressing the concerns of investors and providing greater clarity and differentiation in their investment strategies.