As we all turn the page to a new decade, the investment management industry may be poised to enter a new era as well, thanks to the emergence of a new type of exchange-traded fund (ETF).1 In 2019, the US Securities and Exchange Commission granted approval to several industry players, including Natixis Investment Managers, to launch actively managed non-transparent ETFs, the first of which are expected to hit the market in 2020. To properly understand why these events have made such waves, it is worth taking a step back and revisiting the evolution of the ETF structure.

A Brief History of ETFs
ETFs were introduced to the market in 1993, and have since grown to house over $4 trillion in assets in the US across more than 2,300 products. The fact that the ETF wrapper offers increased tradability, and the potential for lower costs and improved tax efficiency – amongst other benefits – has helped to drive this growth. As a result, there has been a trend of assets migrating from mutual funds to ETFs over the years. This has inspired many asset management firms to work on new ways to offer more investment strategies within the ETF wrapper.

ETF Facts vs. Fiction
Despite their popularity, a big misconception regarding ETFs persists: that they are only for index funds. In fact, actively managed ETFs have been around for more than a decade. However, most active managers have been hesitant to bring their strategies to market in an ETF structure due to mandates requiring them to be fully transparent – publicly disclosing their exact holdings every day. Equity managers have been deterred by this transparency requirement out of concern that other market participants might front-run their strategies and harm their clients. In terms of active fixed income ETFs, the fear of copycat trading is less pertinent, as bonds trade over the counter and are inherently more difficult to front-run. As a result, a number of actively managed bond ETFs are already on the market and – in what could be a preview for the equity space – have amassed meaningful inflows in short order.

A Watershed Moment for ETF Innovation
Recent SEC approvals for active non-transparent ETF solutions free equity managers from having to disclose their holdings on a daily basis, paving the way for them to offer investors their strategies in an ETF wrapper.

With trillions of dollars of assets currently residing in active mutual funds, it is not hard to envision widespread investor interest in active non-transparent ETF products, given that they have the ability to combine the portfolio management know-how of skilled portfolio managers with the potential benefits offered by the ETF vehicle. Natixis and several other firms have already filed with the SEC in the hopes of launching their first active non-transparent ETFs in 2020, providing investors with their first look at the products that could come to play a major role in the ETF space over the next decade.
1 An exchange-traded fund, or ETF, is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund. ETFs trade like common stock on a stock exchange and experience price fluctuations throughout the day as they are bought and sold.

This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.

Exchange-traded funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns.

Unlike typical exchange-traded funds, there are no indexes that an active ETF attempts to track or replicate. Thus, the ability of an active ETF to achieve its objectives will depend on the effectiveness of the portfolio manager.

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