By Noah Hamman
I had the opportunity to participate at a conference sponsored by the NYSE. The entire conference was focused on active ETFs, which is a great milestone to have a fully dedicated event towards active ETFs. One of the panels focused on the firms seeking approval for non-transparent ETFs (there are several each with different approaches). While we don’t have anything against non-transparent ETFs, we are advocates of transparency. I know some asset managers say they can’t offer their services in the current transparent approach that is approved by the SEC, but we have made many arguments as to why they should not be concerned – including the fact that many of these asset managers offer their investment management to large institutions which also provide a high level of transparency, and with model programs where trades are sent to a platform to implement in retail separate accounts. I hope that investors will demand transparency, but I know for some investors, they will not care. If they can finally access someone they believe to be a talented investment manager, in an efficient ETF structure, they will likely not be concerned about the level of transparency provided. What I was most interested to see at the conference, was the market making firms (a separate panel), were also excited about trading non-transparent ETFs. On one hand, I was a bit surprised. If there is one thing I have learned watching trading and volume and spreads on active ETF, is that the market makers hate surprises. So, I had always been under the impression that market makers would not be excited about non-transparent ETFs, however hearing their interest and thinking about it a bit more, I realized how many assets will likely move from the mutual fund structure to the ETF structure, a structure that could greatly enhance their market making revenue. Of course, it appears that whether it’s the custom/made up indexes designed to provide better performance over traditional indexes, or transparent active ETFs, the growing transition of assets from mutual funds to ETFs seems to be great for the market makers. I still think spreads will be challenging, and there will be a need for educating investors on how to trade ETFs and understanding liquidity versus trading volume. The great news is that all the participants from asset managers, to the exchanges, asset services and market makers seem to see a bright future ahead for actively managed ETFs.
