ETFs have taken over the investment world and are quickly putting mutual funds out of business. Their low fees and active trading during market hours characteristics make them more attractive than mutual funds. But, by far, their most important attribute is their transparency. While mutual funds disclose their portfolios only once a quarter, ETF holdings can be seen every day, allowing for real-time pricing and tradeability. Until now. Actively-managed non-transparent ETFs secured regulatory approvals this week and will soon be widely available to investors.
What is the need for these non-transparent products? It is to cater to the active managers who remain tethered to the mutual fund structure. While transparent ETFs has encouraged passive investing, the new non-transparent ETFs try to offer a happy medium: they allow active managers to mask their strategies, while keeping the pricing of the fund liquid enough that it can be traded throughout the day. What makes the non-transparent arrangement work is the presence of a third party, sometimes called a market maker or an “authorized participant,” which knows enough about the fund’s portfolio to keep the securities it owns roughly in line with how its shares trade.
On Thursday this week, the Securities and Exchange Commission gave its blessing to a wave of companies, including asset managers like T. Rowe Price and Fidelity, to use their own versions of the products in their own funds and these products will soon be available to investors.
Future Wealth’s View
Opaqueness is investment products has never benefited the average investor. Many financial advisors and mutual funds hide their fees and churn portfolios without their clients knowledge and take positions in esoteric funds that leave investors confused. It is not uncommon for clients have positions in several funds from say, Fidelity, and increase their risk exposure rather than reduce it through diversification. ETFs allowed investors to see through this scam and now hold positions that are clear, researchable and shows exactly what it costs.
To bring the masking of positions to the ETF industry should never have been allowed but absent that, active managers, who are struggling already to beat the index, will have simply no “edge” over the passive management strategies adopted by financials advisors like us – Future Wealth LLC.
Ultimately, whether active managers like it or not, whether non-transparent ETFs help them or not, investors have a right to be unfaithful.