We’ve explained what ETFs (exchange traded funds) are previously on Mullooly Asset Management podcasts. Check out the archives here: https://mullooly.net/tag/etfs/ This week, Tom and Brendan got together to discuss a new type of ETF that’s awaiting SEC approval. Money managers such as BlackRock, Eaton Vance, and State Street (just to name a few) have been anticipating the SEC’s decision on nontransparent active ETFs.
Just to review, an ETF is a basket of stocks. The basket is created to mirror an existing index (like the Dow Jones Industrial Average or S&P 500) or a propriety index created by a money manager. A few popular ETFs are QQQ, IWM, SPY, and DIA which all track different US stock market indexes respectively. ETFs are traded daily, like stocks. They tend to have relatively lower expense ratios than mutual funds. Another main difference between ETFs and mutual funds is that ETFs are transparent. By transparent we mean they report their holdings daily. By using sites like alletf.com or etfdb.com, you can find out the holdings of any ETF whenever you want.
So with transparency being one of the distinguishing traits of ETFs, why are investment firms so eager to create a nontransparent version? There are two main reasons that we’ve heard so far. Nontransparent active ETFs will give investors more actively managed options along with the tradable structure of ETFs. Also, many top active mutual fund managers are unwilling to disclose their holdings daily because it would take away their edge. Competitors and other traders would be able to copy their moves or trade ahead of the fund.
So what’s our impression of these potential offerings?
Here at Mullooly Asset Management we firmly believe that transparency is a good thing. Quite frankly, transparency is something we need to see more of in the financial industry, not less.
A few questions that come to mind in regard to these nontransparent ETFs are:
- Will the actively managed nontransparent ETFs mean higher fees for investors?
- If so, will the fund performance justify the additional cost?
- Who will benefit from the nontransparency of these funds? The investors? The money managers offering them? Both? Neither?
There’s plenty to consider on this topic, and a lot of these questions can’t be answered until the funds are actually offered. Only time will tell if the SEC eventually approves nontransparent active ETFs. If and when they do, we’ll certainly evaluate them to assess what kind of benefits they might offer investors. For now, listen to our weekly podcast to hear more about nontransparent active ETFs from Tom and Brendan.