Choosing Your Path to the Semi-Transparent ETF Age

Choosing Your Path to the Semi-Transparent ETF Age Over the last decade, active asset managers have come under increased pressure as investors have shifted assets to lower-cost products, such as Exchange-Traded Fund (ETFs). The global ETF market has grown dramatically with assets under management surpassing $6 trillion at the end of 2019. 1 Active asset managers have been eager to find a way to leverage the ETF structure, but some have been reticent because they fear their investment strategy could be front run by the transparency of the structure. US active managers may have finally found the answer they have been looking for, when the Securities and Exchange Commission (SEC) approved a raft of new semi-transparent ETF models. A semi-transparent ETF has most attributes of a traditional ETF but it doesn’t fully disclose its holdings daily. The SEC initially approved Precidian Investments’ ActiveShares ® model in May 2019, followed by the approval of models by Blue Tractor, Fidelity, Natixis, and T. Rowe Price in November. By removing the main barrier that has kept many active asset managers on the sidelines, the semi-transparent ETF could spark further growth of the ETF industry. Why This Time is Different While there is excitement about the new options, this isn’t the first attempt at semi-transparent ETFs. The previous attempt wasn’t actually an ETF but rather a new fund structure, known as the Exchange-Traded Managed Fund (ETMF). The ETMF is a hybrid between a mutual fund and an ETF that allows for intraday trading but retains quarterly portfolio disclosures. However, unlike an ETF, investors trade the ETMF intraday without knowing the price of the fund. Instead, orders for the ETMF are placed throughout the day but not priced until the closing price of the fund is calculated, which means institutional investors can’t use the ETMF for trading purposes. In addition, the trades are placed with premiums for buys and discounts for sells, so retail investors bear extra trading costs for what is essentially a mutual fund. Markets and Securities Services Here’s what managers need to consider when embarking on their semi-transparent ETF journey. 1 ETFGI, Global ETF and ETP Industry Landscape Insights Report, November 2019.