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Here's What's Ahead for Active ETFs in 2022: Cerulli

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What You Need to Know

  • Fully transparent active ETFs are the preferred structure for ETF issuers, says Cerulli Associates.
  • Asset managers could potentially issue ETFs as a new mutual fund class once Vanguard's dual-class patent expires.
  • More ETF issuers are interested in sustainable and other types of active ETFs than advisors, according to Cerulli.

Active ETFs, which were all the rage in 2021, are expected to continue their upward trajectory in 2022, with fully transparent funds rather than smart beta funds the preferred structure among issuers, according to Cerulli Associates.

The global research and consulting firm reports that 70% of ETF issuers polled are planning or developing transparent active ETFs, which disclose their holdings on a daily basis. Fifty percent of those polled are planning or developing non-transparent funds and 42% of them are likely to use Fidelity’s non-transparent — they call it semi-transparent — structure.

The Fidelity structure publishes a proxy portfolio daily that consists of actual portfolio holdings, cash, and representative ETFs that hold securities similar to those held by the ETF. The percentage overlap between the holdings of the ETF and its proxy portfolio are also published daily.

“The transparent active opportunity is most attractive relative to semi-transparent, strategic beta and passive offerings,” according to the Cerulli report. “Launching transparent active product is likely the most significant asset-gathering opportunity but firms can also be successful with semi-transparent offerings.”

The Cerulli report, led by Daniil Shapiro, associate director of product development, notes that 25 of 42 semi-transparent fund products are based on existing mutual funds.

Some mutual fund issuers have chosen to convert existing active mutual funds to active ETFs instead of launching a new ETF that’s similar to an existing mutual fund or a clone of one. Vanguard has historically taken another approach: adding an ETF share class to existing mutual funds, which has reduced capital gains for investors in both fund types.

The fund giant patented this structure, but that patent ends in 2023. Cerulli says assets managers considering launching active ETFs should keep an eye on that expiration.

Cerulli reports that 42% of ETF issuers polled are planning to launch transparent active sustainable ETFs but notes the disconnect between issuers’ interest in sustainable ETFs and advisors’ interest. Fifty-eight percent of issuers see an “unmet demand for sustainable ETFs while only 28% of advisors do,” the report says.

To close that gap, issuers need to educate advisors and offer sustainable ETFs that appeal to them and their clients, according to Cerulli.

Its report also notes other areas where ETF issuers see more unmet demand than advisors do: in U.S. and international fixed income, alternatives, municipal bond, defined income, multi-asset, commodity and sector equity funds.

U.S. equity is the only category where advisors see more demand for ETFs than issuers do.

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