Industry Updates

Active non-transparent ETFs poised to draw assets from mutual funds

George Geddes

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A significantly large volume of financial advisors are attracted to the concept of actively-managed non-transparent ETFs, according to a recent study by Broadbridge Financial Solutions.

The new ETF structure became topical following the US Securities and Exchange Commission gave the green light to ActiveShares’ ETF filing for the first non-transparent ETF.

Named The Dawn of Active Nontransparent ETFs, the study surveyed 200 financial advisors with over $10m in assets under management, a quarter of which being in mutual funds and/or ETFs. It found 85% of participants surveyed thought ActiveShares’ ETF concept was appealing. Furthermore, 83% said they hope their favourite mutual funds introduce an active ETF product.

The majority of advisors (63%) said they would draw assets away from open-end mutual funds if they were to start investing in an ActiveShares ETF product. The next most popular source with 46% was to use new assets not yet invested.

Despite the advisors’ eagerness for the uniquely structured ETF to come to market, majority remain slightly hesitant. Only 22% would likely invest within the first 12-months of the product launching with 64% of advisors saying they would likely use it but after being available for a year.

The most prominent concerns towards active ETFs are that they are too new and untested so are hard to judge. Despite it being the ETF’s main selling point, advisors are also not sold on the lack of transparency. Other issues include fees in comparison with passive ETFs and difficulties explaining to clients.

From the survey, it is apparent advisors do not fully understand actively-managed and non-transparent ETFs and need further education on the product’s structure. Nearly half (49%) said they would want to speak face-to-face with the wholesaler to receive more information and education on the products.

While the US is first to give the go-ahead for non-transparent ETFs, small steps have been made in Europe as the Central Bank of Ireland has suggested it might be appropriate for ETF issuers to only disclose their holdings to authorised participants rather than the whole market.

Matthew Schiffman, principal for distribution insight at Broadridge Financial Solutions, commented: "There is a clear awareness and learning curve among financial advisors given how recently the SEC has approved active non-transparent ETF technology."

"What is interesting is the level of comfort advisors already have with the concept of active, opaque ETFs – and how quickly they would plan to allocate assets to these products."

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