Missing the Point

Who Wants an Opaque ETF?

Funds that are less transparent and more expensive don't make a lot of sense.

Investors have gravitated toward exchange-traded funds for a few obvious reasons.

They're easy to trade. They disclose what they own regularly. And they're typically cheap, charging a fraction of the management fees demanded by more actively managed strategies.

But for some reason, asset managers who are late to the ETF game are trying to break into the field with the type of strategy that investors have been rejecting: namely less-transparent actively managed funds that are probably more expensive. This doesn't make a ton of sense.

Cheap Winnings

While ETF assets have surged in the past five years, revenues have lagged behind

Source: Bloomberg Intelligence

Precidian Investments, for example, a New Jersey asset manager, has been trying to obtain regulatory approval for an actively managed ETF that would report its holdings only quarterly rather than every day, like other ETFs, according to Rachel Evans and Annie Massa of Bloomberg News. Eaton Vance last year started an opaque ETF, Eaton Vance Stock NextShares, which has amassed only $21.5 million of assets since it started trading.

Soft Launch

Eaton Vance's first non-transparent, active ETF raised less than $30 million

Source: Bloomberg

It's understandable that asset managers are scrambling to break into the ultra-hot exchange-traded fund industry. They've been struggling to avoid redemptions while ETFs enjoy yet another quarter of record-breaking flows. But these attempts to draw in new customers are missing the point about why ETFs have gained so much traction.

Mass of Cash

Investors have poured money into ETFs at an accelerating clip in recent years

Source: Bloomberg

Investors aren't looking for more complicated, opaque funds, especially active ones. They like putting money into passive ones, especially as monetary policies have spurred big broad-market bond and stock gains. They appreciate the low fees and simplicity of the structure.

They haven't really shown much interest in active ETFs, even those that disclose their assets daily. Actively managed ETFs account for just 1 percent of total ETF assets, according to Bloomberg Intelligence's ETF analyst Eric Balchunas, and most of those assets are in funds managed by very popular and well-known managers.

"You can put the dog food in a fancy new bowl, but the dog still has to want to eat it," Balchunas said. "These structures could be a solution in search of a problem."

Yet it seems as if investment firms want to push these non-transparent ETFs, with some hoping that regulators will approve them more quickly because of the new U.S. presidential administration.

At best, these new ETF offerings will attract some money and perform decently. Some argue that a new era of investing is upon us, in which active fund managers have a chance to reliably outperform indexes, particularly among bond funds.

At worst, they could give the ETF industry a bad reputation. They could deliver terrible performances and then end up having trouble meeting redemptions because of their opaque holdings.

The likely reality will be somewhere in between. Most won't raise much money, and they'll fizzle out as an idea that never really took hold.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lisa Abramowicz in New York at labramowicz@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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