2020 could prove to be an interesting year for ETFs because of regulatory changes and the proliferation of commission-free trading, but not necessarily a transformative one.
For the first time ever, ETFs that don’t disclose their holdings on a daily basis will be able to come to market following Securities and Exchange Commission approval of their underlying structure, but whether investors will buy these nontransparent ETFs is an open question.
“The problem they will wind up solving is an asset management one concerning transparency. Investors don’t really care,” says Ben Johnson, director of global exchange-traded fund research at Morningstar. But even asset managers may not benefit much.
Smart beta ETFs may have already eaten up much of the demand for such products, says Eric Balchunas, senior ETF analyst at Bloomberg Intelligence.
The SEC has given several companies final approval for nontransparent ETF structures: ActiveShares, T. Rowe Price, Fidelity, Natixis and Blue Tractor, and the first such ETF. American Century, which has licensed the ActiveShares strategy, could come to market with two such equity ETFs — large-cap value and equity growth — as early as the first quarter.
The SEC also approved a rule that will make it easier for asset managers to launch new ETFs because they will no longer have to file for exemptive relief under the Investment Company Act of 1940 for every single fund they want to launch.
The ETF modernization rule, which takes effect the last week in December, also allows all fund sponsors to use in-kind (“custom”) baskets of securities and assets in the creation and redemption of shares, which analysts say should enhance liquidity.
Investors could benefit from the requirement that these traditional transparent ETFs publish their full portfolios daily on their website and disclose historical premiums and discounts to net asset values as well as bid-ask spreads.
This SEC ETF rule, also, is expected to be “most consequential for asset managers” rather than investors because they will be easier to launch, says Dave Nadig, managing director of ETF.com.