How can active asset managers distribute their strategies in ETFs?
The opportunity to offer non-transparent ETFs is highly attractive and lucrative, particularly for active managers amid an industry-wide shift toward low-cost passive investments.
ETF Issuers’ Plans to Develop Exchange-Traded Vehicles by Type, 2019
Source: Cerulli Associates
Asset managers that offer active strategies are encouraged to evaluate the four non-transparent ETF structures that have both received regulatory approval and are seeking licensees (Precidian, BlueTractor, NYSE/Natixis, and Fidelity). The structures will likely charge 3 to 5 basis points of underlying assets, and differ mainly in what they disclose (intraday pricing, if any is offered, and the types of holdings held out as representative for the proxy portfolio approaches). Asset managers should carefully gauge whether the structures can support their strategies, and whether the disclosures provided by each will be enough to facilitate efficient trading.
In discussing the potential for asset managers to find success in launching products via active non-transparent structures, Cerulli encounters significant polarization across the industry. Many asset managers believe that they will be able to successfully distribute their products via the structures, taking advantage of the tax efficiency of the ETF vehicle while hopefully targeting clients in new channels. Other industry participants are significantly less optimistic—with their concerns outlined below. Cerulli notes that none of these is insurmountable.
ETF Issuers: Estimate of Non-Transparent/Semi-Transparent Potential AUM by 2025, 2019
Source: Cerulli Associates
Beyond product selection, pricing the products is a heavy lift for active managers. ETF allocators are used to cost savings being associated with the ETFs, but one research participant built a case for charging even more given their improved tax efficiency. The reliance on a licensed structure will add to the cost associated with the product while the lack of sub-transfer agency fees provides some savings. However, a third component to product pricing is revenue sharing. Luckily, existing active managers are likely experts at navigating revenue-sharing considerations and ensuring their distribution partners are satisfied.
It’s also important that asset managers help broker/dealers manage conflicts—for example, a non-transparent active ETF priced identically to a mutual fund may be a less efficient holding, especially considering the wider bid-ask spreads that may come with non-transparent ETF structures.
Given the referenced additional costs of licensing fees and revenue sharing, it will not be easy for active managers to offer attractive pricing on their non-transparent ETF products, which Cerulli believes is critical to their success. Cerulli cautions active managers to respect the scale of fee compression in the ETF landscape and not over-rely on the ability of their brand and distribution forces to drive sales of the products.