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Nontransparent ETF Rules Could Benefit Active Managers and Grow The Space Say Experts

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With the trend towards nontransparent ETFs from funds like Fidelity, T. Rowe Price, Natixis and Blue Tractor, which have all gained preliminary SEC approval to launch their own nontransparent ETFs, some experts believe active managers may be attracted to the ETF space, given reduced costs and more freedom from regulation.

Unlike standard ETFs, which are required to disclose their holdings daily, nontransparent ETFs will only be required to disclose their holdings once a quarter, giving active managers, who opt to keep their investing methods under wraps to avoid getting front-run, another vehicle through which they may execute their strategies.

“I think there’s going to be a place for” these kinds of funds in the ETF market, Chris Hempstead, director of institutional business development at IndexIQ, said on CNBC. “It’s going to come down to the $8 trillion mutual fund industry who hasn’t really put these strategies into an ETF wrapper. How do they sell it? How do they distribute it? Who are they marketing to? The market will absorb it. The market makers and liquidity providers … will be able to support these products.”

While portfolio performance still falls squarely on the shoulders of fund managers, the reduced costs associated with ETFs could be helpful to managers, explained Douglas Yones, head of exchange-traded products at the New York Stock Exchange. NYSE is working with the approved nontransparent-ETF issuers.

“A wrapper’s not going to change performance. It can change tax efficiency. It can also change cost,” Yones said on the same segment. “It’s important to remember: a lot of times, active management, because it’s in an expensive wrapper, [is]charging 50 or 60 basis points.”

This is also an important factor for investors as well, who need to keep a watchful eye on fees, that can be as much as 1-2% of assets, and can easily eat away at an ETF’s gains.

Still, if managers are excellent performers, they may not even have to sacrifice their higher fees, as investors will be reaping benefits and may not care, explained Hempstead.

“Just because a few large managers have been able to cut fees to nearly zero, does not mean that a successful active manager, one that you’re familiar with where you’re going to put your money in, can’t charge 30 or 40 or 50 basis points to manage that fund,” Hempstead said. “If they’re earning the alpha and they’re earning the business, then they should charge more.”

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