Financial advisors are big fans of nontransparent and semi-transparent actively traded ETFs, according to a new survey from Broadridge Financial Solutions.
Its survey of 200 financial advisors with $10 million or more in assets under management, including 25% in mutual funds or ETFs, found that more than four in five advisors are hoping their favorite actively managed mutual funds become available in a nontransparent ETF structure.
Until recently, it was not possible for an ETF to exist that did not disclose its holdings on a daily basis — unlike mutual funds, which disclose holdings quarterly with a delay — but in May the Securities and Exchange Commission gave final approval to a nontransparent ETF strategy called ActiveShares, developed by Precidian Investments. Its CEO, Daniel McCabe, expects the first ETF using the strategy will debut sometime before year-end.
At least 10 mutual fund companies have already licensed the strategy from Precidian and approximately 30 more are in talks to do the same, according to McCabe, and a handful of other mutual funds have filed applications for their own nontransparent ETF structures with the SEC, including T. Rowe Price and Eaton Vance.
“What is interesting is the level of comfort advisors already have the concept of active, opaque ETFs — and how quickly they would plan to allocate assets to these products,” said Matthew Schiffman, principal for Distribution Insight at Broadridge, in a statement.
Eighty-five percent of the advisors surveyed said they are likely to use actively managed nontransparent ETFs and close to half expect to allocate new, uninvested assets to such funds. Even more, 63%, said they anticipate reallocating assets from actively managed open-end mutual funds to nontransparent active ETFs.
Nontransparent ETFs are potentially more attractive to advisors than similar actively managed mutual funds because of greater tax efficiency and liquidity and potentially lower fees.
Twenty-two percent of the advisors who answered the Broadridge survey said they would invest client funds in nontransparent ETFs within 12 months, and another 64% said they would do so in the 12 months after the first product hits the market.
“Asset managers shouldn’t let this moment pass, as they now have a prime opportunity to further engage with advisors, primarily through wholesales and other one-to-one channels,” said Schiffman in his statement.
Those asset managers should keep in mind that advisors’ confidence in these new funds will depend on performance, liquidity and daily volume and the the asset manager’s brand strength, according to Broadridge. More than half the advisors surveyed named all three variables including almost 70% who identified the first two. Advisors aren’t without concerns about these ETFs, however. The key concern: that they’re too new and untested, according to the Broadridge survey.
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