Transparency has been one of the differing factors when it comes to discerning mutual funds and exchange-traded funds (ETFs), but a new crop of actively managed ETFs could open the floodgates for similarly styled funds.
In May, the Securities and Exchange Commission (SEC) approved an ETF structure, developed by Precidian Investments LLC, that would allow actively managed ETFs to operate the same way as mutual funds–by bypassing the daily fund disclosure requirement where investors can see the ETF holdings. Per a Pensions and Investments article, the approval “was followed this month by regulatory notices of four additional structures for actively managed ETFs seeking relief from certain stipulations in the Investment Company Act of 1940.”
The funds, however, would still have the flexibility of an ETF when it comes to using them as a short-term trading tool.
“While a separately managed account may be cheaper on an expense-ratio basis than an ETF, setting up or winding down an SMA is still a process for the end investor,” said Edward Rosenberg, senior vice president and head of exchange-traded funds at American Century Investments. “Whether for transition management or a long-term investment, an ETF, transparency aside, offers investors more control over their entry and exit points.”
It remains to be seen whether these types of funds will become popular with investors, but if they do, it can certainly close the gap between the number of actively manged funds and passively managed funds.
“Active ETFs currently comprise just 2.2% of the U.S. market, according to XTF through Nov. 15, and 76% of those assets are in fixed-income funds,” wrote Edward Rosenberg in the aforementioned Pensions and Investments article. By comparison, active products make up 59.6% of the total $19.4 trillion U.S. fund market as of Sept. 30, according to Morningstar Direct, and 31.6% of those assets are in fixed-income funds.”
One of the challenges of active ETFs is their relatively higher cost compared to their passive counterparts. If investors do have an active option that can rival passive options in fees, it could make for an interesting ETF landscape.
“I’ve looked at some of these products over the last few years,” said Tim McCusker, chief investment officer for Boston-based NEPC LLC. “I don’t know if they can offer anything that other pooled structures do not, and I don’t think there is a desire or need for a vehicle that can be traded through a trading day. But, some of these structures have offered the benefit of lower operating costs and that is very interesting.”
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