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Q2 2020 hedge fund letters, conferences and more
Active nontransparent ETFs (ANTS) have frequently been in the news lately, and many wealth managers have asked, “How does this affect my practice and my clients?”
Some background on what ANTS are, and why they have become a new addition to the investment fund marketplace will be helpful to consider the impact on a wealth manager’s practice.
Over the last decade, ETFs have become an ever-larger portion of the investment fund universe. Passive ETFs provide low-cost, tax-efficient, diversified access to sectors, geographical regions, and key asset classes. Where the open-end mutual fund industry is split between passive index funds and actively managed funds, are more than 90% of ETFs track passively managed indices, with very little market penetration for actively managed ETFs.
The reason is structural. A key component of ETFs is transparency, since to trade on the securities markets like an equity, the market makers must know what comprises the ETF portfolio and price those underlying securities throughout the trading day. ETFs publish their portfolio composition files every night, and those portfolios are available to the investing public so that the potential investor will know what the ETF holds.
This concept is great for transparency but not for the portfolio manager expending time and effort on research, analytics, and using personal wisdom and experience to make portfolio selection decisions. If the results of that time and effort are fully available to the public to see and mimic each night, the investor might think, “I can just look at the portfolio and save the investment advisory expense.” Once the portfolio manager realizes this the natural reaction is usually, “I’m making all this effort for nothing, because I won’t get paid for my intellectual property.”
ANTS and semi-transparent structures are designed to deal with this very issue. There are several structures that have been proposed and have been authorized for license by the SEC for use in ETFs. Each of the opaque structures avoids disclosing the actual ETF portfolio. The most non-transparent structure does not publish its portfolio daily at all, instead adopting the open-end mutual fund reporting timeline of publishing its portfolio semi-annually. The most transparent of the structures publishes most of the actual holdings within its ETF but alters the asset allocation and percentages of holdings to conceal some of the portfolio decision-making.
Read the full article ehre by Kip Meadows, Advisor Perspectives
