As a sponsor of transparent actively managed ETFs, as well as a staunch proponent of transparency in general, I believe that the SEC will eventually approve non-transparent active ETFs.
I am not referring to the exchange-traded managed fund (ETMF) structure, a new type of exchange-listed, non-transparent investment product for which Eaton Vance received SEC approval last year to offer. That product structure will require a significant amount of infrastructure development and education before it can come to market.
However, a true non-transparent actively managed ETF could easily fit into both the brokerage and exchange-traded infrastructure that exists today. An unusual Freedom of Information Act (FOIA) request submitted by Eaton Vance for an SEC comment letter regarding Precidian’s application to offer non-transparent active ETFs indicated that the SEC is focused on one main issue: How can that type of ETF be efficiently priced?
Interestingly enough, Vanguard today operates its index-based ETFs lineup in a non-transparent fashion. Many may be led to believe that because ETFs track an index, then the underlying constituents are fully visible and updated on a daily basis. Vanguard shields its ETF holdings — reporting portfolio information at month-end with a 15 day-lag — because they take an “optimized” approach to replicating the index, which allows them to keep their proprietary methodology a secret.
With this cloaking of transparency, how do market makers effectively make markets and address any slippage in this non-transparent optimized process? If AUM growth is any indicator, most investors believe Vanguard ETFs trade very efficiently. Thankfully, the operation and trading behind these ETFs all run smoothly. However, the reality is that Vanguard could get it wrong (although probably not by a significant margin), as could anyone else.