Warren Buffett and other famous stock pickers use specific strategies to generate above-market returns. While Buffett makes money when his stock picks become known, most portfolio managers generate revenue from asset management fees—not performance. As a result, transparency is counterproductive because it can spawn copycats.
Surprisingly, most active exchange-traded fund (ETF) managers don’t seem to mind full transparency. Despite the launch of active non-transparent ETFs (ANTs) in 2019, less than 50 of nearly 900 actively-managed ETFs choose to disclose their holdings on a weekly or monthly basis rather than at the end of each trading day.
Let’s take a closer look at whether transparency really matters for portfolio managers and why non-transparent ETFs haven’t become as popular as many thought.
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What Are Non-Transparent ETFs (ANTs)?
Active non-transparent ETFs, also known as ANTs, are actively-managed ETFs that disclose their holdings monthly or quarterly rather than on a daily basis. As a result, portfolio managers seeking to capitalize on investor appetite for low-cost ETFs can employ their strategies without the risk of others copying them or front-running their trades.
The Securities and Exchange Commission (SEC) began greenlighting non-transparent ETFs in 2019. Since then, issuers have launched nearly 50 ANTs targeting everything from value to sustainability. The largest ANT is the Nuveen Growth Opportunities ETF (NUGO), with about $2.5 billion in assets, but most ANTs are well under $500 million in size.
By comparison, the largest transparent actively-managed ETF has nearly $20 billion in assets with nine funds posting over $5 billion in assets. For example, Cathie Woods’ ARK Innovation ETF (ARKK) has over $8.5 billion in assets despite falling by more than half so far this year—suggesting that her transparency may be keeping shareholders on board.
Why Issuer Adoption Rates Remain Low
Many industry experts predicted that ANTs would bring more mutual fund issuers into the ETF fold. While many mutual funds have launched active ETFs, the Capital Group, Dimensional Fund Advisors, Neuberger Berman, and most others have done so under a traditional structure. Only Fidelity, Schwab, Nuveen, and a handful of others opted for an ANT structure.
There are three likely reasons why:
- Many portfolio managers were held back by applying for an exemption from the Investment Company Act of 1940 rather than a desire to keep their daily trades a secret. In 2019, the SEC introduced Rule 6c-11, enabling ETFs to operate within the scope of the act without an exemption. As a result, the cost and time to market for launching ETFs fell sharply.
- Many portfolio managers that would launch ANTs don’t want to cannibalize their mutual fund business. Since ETF expenses are much lower than mutual funds, successful managers worry they may have to take a fee cut and risk eating into their profitable mutual funds over time. As a result, there may be many successful active strategies that never see life as an ETF.
- Investors in mutual funds respect stock picking strategies, whereas investors in ETFs want low fees and high transparency. For instance, Cathie Woods’ ARK Innovation ETF has fallen by more than half so far this year, but still has a lot of assets under management. The secret to her success may well be her transparency and regular communication via research updates.
The Bottom Line
Active non-transparent ETFs, or ANTs, enable active portfolio managers to create ETFs without having to disclose their daily holdings. As a result, they can safeguard their ‘secret sauce’ and avoid front-running and other transparency-related risks. While active ETFs have taken off, ANTs remain relatively uncommon for a variety of reasons.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.