When the Securities and Exchange Commission approved the first structure for a nontransparent ETF in May 2019, the decision was hailed by some as a breakthrough for asset managers of actively managed funds.
That’s because ETFs using these structures can delay disclosure of their holdings, unlike traditional ETFs, which must reveal their holdings daily. Asset managers of nontransparent ETFs, also known as semi-transparent ETFs, can keep their “secret sauce” hidden from competitors and avoid front running.
Now Fidelity Investments, which has three such ETFs and is licensing its semi-transparent structure, has released a research report that lauds the benefits of these ETFs for investors as well.
Reducing the odds of front-running reduces the odds that a security being bought by a fund would be bid up in price, which would potentially decrease the return of that strategy, according to Fidelity.
Less front-running also gives portfolio managers the time they need to manage cash flows and shift capital out of existing holdings into new ones in order to maximize alpha, which also benefits investors, according to the Fidelity report.
Portfolio managers of nontransparent ETFs can more easily extend the duration of a transaction from days to weeks, which “could cut the cost of a trade by half — leading to savings that could explicitly benefit shareholder returns,” according to the report.
“Reducing the risk of front running benefits shareholders by supporting an asset manager’s flexibility in managing trading costs and time frames,” according to the report, written by a number of equity market researchers and product group executives led by Darby Nielson, the firm’s managing director of equity research.
The report concludes that the changes in SEC regulation that allows for the creation of nontransparent ETFs — it calls its three such funds “actively managed equity ETFs” — will lead to “a proliferation of choices for investors who are seeking investment vehicles that combine the potential benefits of an ETF structure with those of active management.”
Greg Friedman, head of ETF management and strategy at Fidelity Investments, tells ThinkAdvisor that these types of ETFs affect “the whole franchise” across Fidelity, including the trading desk. “We may have a viewpoint we want to execute on. That research drives our performance.”
He said Fidelity has no intention to move some actively managed mutual funds into these semi- transparent structures.
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