Active ETFs have become increasingly popular over the past couple of years. Since 2020, active ETFs have accounted for about 60% of all newly launched funds while their assets have more than tripled. Still, mutual funds hold about $21 trillion in assets compared to just $6.2 trillion for ETFs, meaning there’s still a lot of room to grow.
Let’s take a look at the rise of active non-transparent (ANT) ETFs and why they could encourage more mutual funds to offer ETF alternatives.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
What Are Active Non-Transparent ETFs?
Active non-transparent ETFs operate in the same way as conventional ETFs, except they disclose the contents of their portfolios on a quarterly rather than daily basis. As a result, asset managers using proprietary strategies don’t have to regularly share their stock picks with the public, thereby enabling anyone to copy them.
Since they don’t disclose holdings, ANT sponsors must constantly monitor spreads and evaluate how well the ETF tracks its underlying net asset value. The concern is whether market makers can effectively arbitrage away price discrepancies between the ETF’s trading price and its intrinsic value, and also keep funds liquid with relatively tight spreads.
Due to these concerns, ANTs can only hold U.S. stocks, American Depositary Receipts (ADRs), Global Depositary Receipts of foreign companies, U.S. Treasuries, U.S.-listed ETFs and, sometimes, foreign stocks that trade during U.S. market hours. In addition, sponsors must share data with the SEC to monitor compliance with these obligations.
The Pros & Cons of ANT ETFs
Active non-transparent ETFs are attractive to asset managers who are hesitant to share their portfolio holdings for competitive reasons. After all, retail investors could theoretically replicate these strategies at commission-free brokerages to avoid paying fund expenses. And these attributes have drawn many mutual fund managers into the ETF arena.
For investors, ANTs enable access to active strategies at a lower cost than mutual funds. They don’t have any embedded marketing or distribution costs and redeem shares on an in-kind basis. As a result, buyers and sellers are responsible for paying trading costs and taxes, while long-term holders don’t have to worry about those costs.
The biggest con for asset managers is that they cannot close the fund to new investors, meaning they may have trouble investing in small-cap stocks or other opportunities with capacity limits. In addition, they cannot purchase fixed income or foreign securities, limiting the universe of possibilities and certain types of strategies (e.g., fixed income).
When To Consider ANT ETFs
Active non-transparent ETFs have become increasingly popular, particularly as mutual funds launch ETF versions of their strategies. For investors, these funds have lower fees than their mutual fund equivalents that typically outweigh strategy limitations. As a result, they’re great for taxable accounts where the tax benefits make the most sense.
That said, ANTs aren’t always cheaper or more tax-efficient than conventional ETFs. As a result, investors on the fence about using active versus passive strategies shouldn’t assume that traditional ETFs and ANT ETFs are equal. In addition, some strategies may only be effective with active mutual funds, such as small-cap, international or fixed income.
For asset managers, ANTs open the door to a fast-growing market that has been cannibalizing mutual funds over the past several years. In fact, several large asset managers have begun launching ANT ETF versions of their mutual fund strategies to tap into the market. For instance, last month Schwab launched Schwab Ariel ESG ETF (SAEF) focused on small- and mid-cap stocks that meet ESG criteria. Given the trends, this could continue well into 2022 and beyond.
The Bottom Line
Active non-transparent ETFs have become increasingly popular as active ETFs go back in vogue. This time, many mutual fund asset managers are jumping onto the bandwagon by launching ANT versions of their mutual fund strategies. The result is a win for investors who have access to lower-cost active strategies for their portfolio.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.