Financial advisors find the concept of actively managed, non-transparent ETFs appealing, according to a study by financial data and analytics provider Broadridge Financial Solutions.
Matthew Schiffman, principal for Distribution Insight, Broadridge Financial Solutions.
The study, which surveyed 200 advisors with at least $10 million in assets under management, found that 85% of advisors are interested in the concept, while 83% are hoping their favourite active mutual funds become available in non-transparent ETF format.
Actively managed non-transparent ETFs are moving closer to launch with the US Securities and Exchange Commission recently granting approval for the introduction of Precidian Investments’ ‘ActiveShares’ structure.
The ActiveShares approach masks an ETF’s holdings by inserting a blind trust, known as a ‘confidential account’, between the fund and its authorized participants.
These trusted agents are privy to portfolio holdings and perform creations and redemptions on behalf of authorized participants.
Although fund managers will only disclose holdings on a quarterly basis, ActiveShares ETFs will provide a live verified intraday indicative value (VIIV) every second. This is actually more regular than traditional ETFs which currently publish their NAVs every 15 seconds.
Despite the eagerness amongst advisors for actively managed non-transparent ETFs, most have reported a low level of awareness of the ActiveShares structure. Only 4% of advisors are very familiar with ActiveShares while 37% are entirely unaware and another 37% have heard of the name but know nothing about the technology.
“There is a clear awareness and learning curve among financial advisors given how recently the SEC has approved active non-transparent ETF technology,” said Matthew Schiffman, principal for Distribution Insight, Broadridge Financial Solutions. “What is interesting is the level of comfort advisors already have with the concept of active, opaque ETFs – and how quickly they would plan to allocate assets to these products.”
Reflecting the education gap, most advisors are reluctant to jump into active non-transparent ETFs with their top concern being that these products are too new and untested in the market.
Less than a quarter (22%) of advisors would use non-transparent ETFs within 12 months, while 64% would do so after one year. However, 82% of advisors are interested in learning more about non-transparent ETFs, indicating the opportunity for asset managers to drive education in this space.
Key influences that would boost advisors’ confidence in using active non-transparent ETFs include product performance record (69%), good liquidity/daily trading volume (68%), and asset manager brand strength (55%).
Nearly half of advisors (46%) would allocate new, not-yet-invested assets to non-transparent ETFs. Meanwhile, 63% of advisors foresee active non-transparent ETF assets being re-allocated from actively managed open-end mutual funds.
“Active non-transparent ETFs are likely to be additive to the asset management landscape, as the advisors we surveyed expect to allocate entirely new assets as well as assets from other ETFs and passive open-end mutual funds,” added Schiffman. “Asset managers shouldn’t let this moment pass, as they now have a prime opportunity to further engage with advisors, primarily through wholesalers and other one-to-one channels.”
While the US seems poised to accept active non-transparent ETFs, Europe appears to be some way behind, although the Central Bank of Ireland has indicated it is considering the technology. A successful launch in the States may quicken action across the pond.