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Barron's on Slow Growth of Active ETFs

@LewisBraham has a feature in Barron's, https://www.barrons.com/articles/actively-managed-etfs-51648674407?mod=past_editions

My summary from LINK

FUNDS. The number of actively managed ETFs (846 now) has grown significantly after the SEC rule changes in 09/2019 (Rule 6c-11 for SEMITRANSPARENT ETFs). Yet, the largest active ETFs are still small by AUMs (DFAC, ARKK, DFAT, DFAX, DFAS). The ETF clones of active mutual funds remain tiny: FMAG/FMAGX, etc. But several restrictions (intermarket exchange trading, etc) are hampering the growth of these active ETFs for funds that may hold foreign stocks, bonds (even though most active ETFs before the rule change were active bond ETFs), preferreds, etc. Their ERs are also high. American Funds and Harbor Funds have introduced self-standing active ETFs that don’t pretend to be clones of existing mutual funds.

Comments

  • Are there less actively managed ETFs due to the lower fees or the transparency rules? If you’re not allowed to answer both and must choose one or the other? My uneducated guess would be the fees.

    Enjoyed reading the feature…learning.
  • I don't think that retail investors worry too much about portfolio semitransparency.

    But active ETF ERs are about 75% of comparable active mutual funds/OEF ERs. If they are about 35% of comparable active OEF ERs, that will get active ETFs going. But fund families are worried about that cannibalizing their active OEFs. In the meantime, active OEFs are losing assets to passive ETFs anyway.

    Passive ETF ERs may be only 5% or less of comparable active OEF ERs.

    High ERs were also the issue with factor ETFs for a while. But when Goldman Sachs (I think) jumped/splashed into this area (actually, the ETF area) with very low ERs for factor ETFs, that ruined that gravy train for everybody.

    I think that Vanguard can lead here with very low ER active ETFs as its active OEF ERs are already low and it has nothing to lose. But it may be worried about protecting its huge passive ETF business (it got late into factor ETFs too but that is still a tiny part of its ETF business).
  • edited April 10
    Fidelity and T. Rowe have proprietary semi-transparent ETF structures they can run active strategies inside of. Vanguard currently does not. For Vanguard to run a semi-transparent ETF it would thus have to license an exterior structure from outside of Vanguard, adding a layer of cost, i.e., fees. Vanguard generally doesn’t like to outsource these kinds of things. It could also offer a fully transparent active ETF. But I would be surprised if one of the big asset managers Vanguard works with like Wellington would want full transparency of their trading. The other alternative is to develop its own in-house semi-transparent ETF structure, but that takes time and has regulatory hoops, doable but not an overnight process. What I could see Vanguard doing is offering a fully transparent multi-manager active ETF, making it difficult to front run any individual manager as all the different managers stocks are combined. But Vanguard’s multi-manager active mutual funds aren’t uniformly great. Alternatively, Vanguard could acquire an independent semi-transparent ETF licensing company like Precidian, something it did in the direct indexing space but feels unlikely to me in this case.
  • edited April 10
    I wonder how long before we see active ETFs holding positions in newly-created OEFs that can serve as a 'black box' to get around some of the reporting and investing restrictions ETFs face if they try to hold those underlying assets (foreign/bonds) themselves. So something like, for example, a PRWCX might be 70% stocks easily disclosed and 30% in 'PRWBB or some-such. (I think RPGAX has a 10% holding in a non-public Blackrock 'black-box' offering anyway.)

    It comes down to a business decision, I guess -- ETFs are more attractive to individuals, while OEFs are more attractive to issuers.
  • Q1 equity mutual funds conversion to ETFs -

    "16 mutual funds (from 6 different issuers) with over $40 billion in assets converted to ETFs in 2021. Those ETFs attracted $4.7 billion in net flows since converting, with 12 out of 16 funds converted seeing net inflows. Another 7 mutual funds (worth $18 billion) have announced plans to convert in 2022.

    An interesting aspect of these conversions is that the converting funds can bring over their track record and assets, unlike a newly launched ETF. The funds can also provide potential tax efficiency and a reduction in management fees due to the ETF structure."

    The above info from Fidelity.

    It is possible we will see large active mutual funds converting to ETFs, locking in assets for the managers to earn stable fees not dependent as much by shareholder redemptions.
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