This year could prove to be inter- esting for ETFs because of regulatory changes and the proliferation of commission-free trading,
but not necessarily a transformative one.
Now 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. Whether investors will buy these nontransparent ETFs
is a question.
“The problem [these ETFs] 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.
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
took 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 redemp-
tion of shares, which analysts say should
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.
Leveraged and inverse ETFs also may
have an easier time coming to market
if a new proposed SEC rule is finalized. The proposal would extend the
new modernization rule to those funds.
The proposed rule also standardizes the
framework for ETFs and mutual funds
that use derivatives.
All these changes will likely mean that
investors will have more ETFs to choose
from but will need do their homework
to understand their strategies, says Todd
Rosenbluth, director of ETF and mutual
fund research at CFRA, an independent
research firm. He adds that liquidity of
leveraged ETFs will matter more than
their expense ratios.
WHAT WILL SPUR ETF GROWTH?
Even before these changes take effect,
flows into ETFs have been growing at
a brisk pace while mutual funds overall
have been experiencing outflows. Net
inflows into U.S. ETFs rose to $264.3 billion through Nov. 30, just slightly below
the $264.7 billion pace for the same time
last year, according to ETF.com. But U.S.
ETF assets, near $4 trillion, remain just
20% of U.S. mutual fund assets.
Also the net new number of ETFs as
of the end of November was 109, which
suggests that U.S. ETFs could be the
lowest since 2016.
Continued low fees coupled with
commission-free trading are expected to
attract even more flows into ETFs rather
than mutual funds, but these changes
could have other effects as well. ETFs
from providers that weren’t included
on brokerages’ commission-free ETF
platforms may get more notice, says
Increasingly, lower ETF fees will
magnify the importance of portfolio
construction and performance, according to Morningstar’s Johnson.
“Minor differences in seemingly similar funds’ fees are less meaningful …
when scaled against the differences in
their long-term returns — which can be
many multiples larger,” Johnson wrote
in a commentary last year. “For example, the four least-expensive ETFs in
the large-value Morningstar Category
have a fee spread of just 0.01%. But the
difference amounted to 1.64% annualized for the five-year period through
March 12, 2019.”
ThinkAdvisor.com Senior Writer Bernice
Napach can be reached at firstname.lastname@example.org.
By Bernice Napach
What Does 2020 Hold for ETFs?
Regulatory relaxation may spur growth, but it will come with a needed
deeper dive in structure.