The SEC’s move to modernize its exchange-traded fund (ETF) rules in late 2019 opened the door for active non-transparent ETFs (ANTs). Unlike conventional ETFs, these funds don’t have to disclose their portfolio holdings on a daily basis, enabling managers to avoid tipping off the market or revealing their strategies to the public.
At the time, experts thought the new rules would draw more conventional active mutual fund managers into the ETF fold. BlackRock, Nuveen, American Century, and other large asset managers expressed interest in launching ANTs to draw in more investors without forcing active managers to show their hands to the public.
Fund managers like Nuveen and Fidelity currently have some of the largest ANT ETFs by assets, namely Nuveen Growth Opportunities ETF (NUGO) and Fidelity Blue Chip Growth ETF (FBCG). But, two years on, ANTs have just $4.4 billion in total assets, representing about 1.5% of the active ETF market.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
What’s Causing the Slow Growth?
Investors have flocked into ETFs to lower fees, increase liquidity, improve tax efficiency, and fine-tune their portfolios with specific strategies. While mutual funds still have more assets than ETFs, many individual investors and advisors are turning toward ETFs when building client portfolios, given their simplicity and cost-effectiveness.
The launch of active non-transparent funds assuaged the ETF-related concerns of many asset managers, but they are a step backward for investors already accustomed to transparency. Many prefer to know what they’re buying in an ETF portfolio rather than implicitly trusting a fund manager with a scant track record.
At the same time, many advanced mutual fund strategies aren’t necessarily an ideal fit for an ETF vehicle. For instance, ETF vehicles require fund managers to deploy any new capital immediately, which may not be possible with some strategies. As a result, fund managers might stick with mutual funds that enable them to close the fund as needed.
Potential Growth & Remaining Hurdles
Building longer-term track records could help attract more investment in ANT ETFs. At the same time, larger broker-dealers like UBS, Morgan Stanley, and Merill Lynch could begin offering a small number of portfolios with ANT ETFs embedded within them on their platforms.
That said, ANT ETFs could also continue to see more hurdles. For example, the SEC has long been concerned about whether market makers could effectively arbitrage away price discrepancies between an ETF’s trading price and its intrinsic value to keep funds liquid and maintain tight spreads without accessing the complete portfolio contents.
The Bottom Line
Active non-transparent ETFs haven’t been as popular as many experts thought, but they’ve drawn in more than $4.4 billion as of September 2022. While hurdles remain, they will likely continue seeing some growth over the coming quarters as more fund managers leverage the vehicle and broker-dealers launch new client products.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
