We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
The tables seem to be turning for the$2.6 trillion global ETF industry, which is dominated by passively managed or index-tracking funds. However, their low cost and transparent structure made them highly coveted.
One of the major drawbacks of actively managed ETFs is the obligation of disclosure of daily portfolio holdings, which run the risk of enabling “front-running” of portfolio trades. This means that the revelation of stock holdings will give the issuer’s competitors or other investors the chance of cashing on advance information.
Investopedia goes on to explain that apart from front-running, real-time information on holdings changes in an actively traded ETF and are likely to face logistics issues as ETFs trade throughout a trading session and managers are likely to alter holdings several times in an hour as per their requirement.
Under these circumstances, numerous big asset managers including JPMorgan are pitching for the necessity of active ETFs with nontransparent characteristics, meaning an active ETF not revealing holdings on a daily basis. Not only JP Morgan, BlackRock Inc., American Funds owner Capital Group Cos., and Legg Mason Inc. – all have appealed for the rollout of such of funds.
Inside Nontransparent Active ETFs
The concept was first formulated by Precidian and known as ActiveShares and is seeking approval from the Securities and Exchange Commission. Recently, JPMorgan signed a letter of intent to license for ActiveShares’ model.
As per Wall Street Journal, the approval to the Precidian approach would enable firms like J.P. Morgan, Invesco Ltd. and BlackRock to alter the structure of their mutual funds without divulging their portfolio composition to the likely followers.
The SEC has been reluctant to permit nontransparent products because it would be tough to evaluate the real-time value of an ETF's stockholdings if these are not reported on a timely manner, per the source.
However, Precidian would apparently post the real-time value of its holdings on exchanges. Custodians will know about new share creations and redemptions but keep the details of the trades secret (read: ETMF: A Mutual Fund in an ETF Wrapper?).
Why Such Urgent Need?
Investors should note that active ETFs with their high-cost structure are falling behind. The expense ratio for active ETFs range from 0.08% to 3.29% while charges are pretty low for passive ETFs. This also happened because issuers recently engaged themselves in a price war to gain market share. Blackrock recently cut the expense ratio of active ETF iShares Ultra Short-Term Bond ETF (ICSH - Free Report) from 0.18% to 0.08% (read: BlackRock Slashes Fees, ETF Price War Intensifies).
ETF behemoths like Charles Schwab, Vanguard and BlackRock are presently enjoying first-mover advantages, making it harder for newcomers to make a place for themselves, as per the source.
So, gradually, issuers are turning more innovative and intend to come up with products that are more dynamic and suit the current improving-but-volatile market conditions. We believe that if Precidian’s strategy gets a nod from the SEC, things may become a little easier for newcomers filing for niche or active ETFs. At the current level, market watchers are of the belief that Precidian's approval could give the U.S. ETF industry access to a lot of investor capital.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Are Nontransparent Active ETFs in the Offing?
The tables seem to be turning for the$2.6 trillion global ETF industry, which is dominated by passively managed or index-tracking funds. However, their low cost and transparent structure made them highly coveted.
One of the major drawbacks of actively managed ETFs is the obligation of disclosure of daily portfolio holdings, which run the risk of enabling “front-running” of portfolio trades. This means that the revelation of stock holdings will give the issuer’s competitors or other investors the chance of cashing on advance information.
Investopedia goes on to explain that apart from front-running, real-time information on holdings changes in an actively traded ETF and are likely to face logistics issues as ETFs trade throughout a trading session and managers are likely to alter holdings several times in an hour as per their requirement.
Under these circumstances, numerous big asset managers including JPMorgan are pitching for the necessity of active ETFs with nontransparent characteristics, meaning an active ETF not revealing holdings on a daily basis. Not only JP Morgan, BlackRock Inc., American Funds owner Capital Group Cos., and Legg Mason Inc. – all have appealed for the rollout of such of funds.
Inside Nontransparent Active ETFs
The concept was first formulated by Precidian and known as ActiveShares and is seeking approval from the Securities and Exchange Commission. Recently, JPMorgan signed a letter of intent to license for ActiveShares’ model.
As per Wall Street Journal, the approval to the Precidian approach would enable firms like J.P. Morgan, Invesco Ltd. and BlackRock to alter the structure of their mutual funds without divulging their portfolio composition to the likely followers.
The SEC has been reluctant to permit nontransparent products because it would be tough to evaluate the real-time value of an ETF's stockholdings if these are not reported on a timely manner, per the source.
However, Precidian would apparently post the real-time value of its holdings on exchanges. Custodians will know about new share creations and redemptions but keep the details of the trades secret (read: ETMF: A Mutual Fund in an ETF Wrapper?).
Why Such Urgent Need?
Investors should note that active ETFs with their high-cost structure are falling behind. The expense ratio for active ETFs range from 0.08% to 3.29% while charges are pretty low for passive ETFs. This also happened because issuers recently engaged themselves in a price war to gain market share. Blackrock recently cut the expense ratio of active ETF iShares Ultra Short-Term Bond ETF (ICSH - Free Report) from 0.18% to 0.08% (read: BlackRock Slashes Fees, ETF Price War Intensifies).
ETF behemoths like Charles Schwab, Vanguard and BlackRock are presently enjoying first-mover advantages, making it harder for newcomers to make a place for themselves, as per the source.
So, gradually, issuers are turning more innovative and intend to come up with products that are more dynamic and suit the current improving-but-volatile market conditions. We believe that if Precidian’s strategy gets a nod from the SEC, things may become a little easier for newcomers filing for niche or active ETFs. At the current level, market watchers are of the belief that Precidian's approval could give the U.S. ETF industry access to a lot of investor capital.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>