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The Securities and Exchange Commission is moving closer to approving a new flavor of exchange-traded funds that allow stock pickers to keep their holdings secret.
Asset managers T. Rowe Price, Natixis, Fidelity and Blue Tractor have won the preliminary regulatory approval to launch nontransparent ETFs that don’t require daily disclosure of their positions, according to regulatory filings on Thursday.
“We are certainly confident we will see products in 2020,” Todd Rosenbluth, head of ETF & mutual fund research at CFRA, told CNBC. “There will be appetite for them as we assume they are coming in with a plan and not just dipping a toe into the market, so there is demand for active management in an ETF wrapper.”
An overwhelming majority of the $4 trillion ETF market is index-hugging and passively managed. Active managers have shied away from the booming industry for years because the transparent vehicle would give away their best ideas and expose them to front-running. Now that regulators have grown warmer to the idea of nontransparent ETFs, more active fund managers will soon have a way to play the ETF game.
The ETF industry has had another banner year, with a total of roughly $200 billion in inflows. To be competitive in this crowded market, issuers have pushed fees down drastically, some to zero. Nontransparent ETFs are likely to come with a higher price tag for the active element.
“Some investors may find the higher fees of nontransparent ETFs, likely to be in 50-60 bps band, too rich, when compared with 3-4 bps for vanilla ETFs,” Rosenbluth said. “Some investors are fans of paying as little as possible.”
Precidian Investments already received the greenlight from the SEC in May for its own active ETF model. BlackRock, American Century Investments and Index IQ are among the firms that licensed Precidian’s model.