Dating back to the development of exchange-traded funds (ETFs)1 in the early 1990s, most ETFs have been passively managed strategies, or index products. It wasn’t until around 2008 that actively managed ETF strategies began being launched. Active ETFs are a form of ETF that has a manager or management team making decisions about the strategy’s underlying allocations. As of today, less than $100B in assets is invested in active ETFs, which is a small part of the $4T US ETF business.2

Introducing Active Non-Transparent
Active non-transparent ETFs represent the next evolution of the ETF vehicle. Unlike traditional active ETFs, active non-transparent ETFs do not have to disclose all of their holdings each trading day, which keeps the proprietary work of the management team private. This allows portfolio managers to protect their recent stock picks and prevent investors front-running their trading or free-riding their portfolio allocations.

In 2019, the US Securities and Exchange Commission (SEC) approved certain firms to begin filing for active non-transparent ETFs, allowing them to take the first step in launching these new kinds of strategies. For investors with an interest in actively managed strategies, this is a notable milestone.

Additional Alpha Potential
The active non-transparent ETF has the potential to provide investors with access to two forms of alpha – alpha at the stock selection level and “vehicle level alpha,” which includes the relative benefits an ETF can provide as compared to other investment vehicles. For ETFs, vehicle level alpha can include tax efficiency, the elimination of cash drag,3 and lower operating fees.

We expect to see US equity strategies launched as active non-transparent ETFs sometime in 2020, but other asset classes may not be far behind. What’s important for investors to know is that the debut of active non-transparent ETFs will create opportunities for highly skilled and experienced portfolio managers to make their strategies available in ETF vehicles – and help make 2020 a year to remember.
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.

2 “US Mutual Fund & ETF Industry: Marketplace and Peer Analysis.” Natixis Investment Managers. January 2020.

3 The term “cash drag” refers to holding a portion of a portfolio in cash as opposed to investing in the market.

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.

Active non-transparent ETFs are different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. Non-transparent ETFs will not. This may create additional risks for your investment. For example, you may have to pay more money to trade the ETF’s shares. The ETF will provide less information to traders, who tend to charge more for trades when they have less information. The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for a non-transparent ETF compared to other ETFs because it provides less information to traders. These additional risks may be even greater in bad or uncertain market conditions. The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio. The difference between the non-transparent ETF and other ETFs may also have advantages. By keeping certain information about the Non-transparent ETF secret, the non-transparent ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance.

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