Beforeadvisorsconsider whether to invest in actively managed nontransparent ETFs (ANTs),they might want to consider the pros andcons of this novel investment vehicle.
There are only a handful of these ETFson the market now, but they are sure to proliferate since multiple asset managers havefiled with the Securities and ExchangeCommission for approval to trade suchfunds, including Goldman Sachs AssetManagement and T. Rowe Price.
ANTs, also known as nontransparent orsemi-transparent ETFs, are actively managed ETFs that share one major characteristic with mutual funds: They disclosetheir holdings with a lag, unlike traditionalETFs, which disclose holdings daily. Thedelayed disclosure allows portfolio managers to keep their so-called secret saucesecret for a time to prevent copycats.
Otherwise ANTs are generally likeETFs, with similar advantages overmutual funds: more tax-efficient due toin-kind redemptions; lower fees becausethey don’t have embedded marketing ordistribution costs; trading costs borneby their buyers and sellers, rather thanlong-term shareholders; and intradaytrading and pricing (mutual funds arepriced only at the end of daily trading).
As a result of these advantages, thereis an expectation that some asset managers will choose to replace their activelymanaged mutual funds with an AN T thatfollows the same investment strategy.
All the eight ANTs available
today have lower fees than the retail
share classes of their mutual fund coun-
terparts, according to Ben Johnson,
director of global exchange-traded
fund research at Morningstar.
He laid out the benefits and draw-
backs of ANTs in a recent article on
the Morningstar site that can serve as
a guide for advisors interested in these
new products. Included in his analysis
were the following limitations:
• ANTs currently can invest only in
assets that trade at the same time as the
funds themselves. Equity ANTs, in other
words, are limited to U.S. stocks and to
American Depositary Receipts and Global
Depositary Receipts of foreign compa-
nies. This can hamper a portfolio man-
ager’s ability to invest in their best ideas.
• ANTs lack the ability to close investments from only new investors, a tacticactive mutual fund portfolio managerscan use to protect existing shareholders.
Given this limitation, ANTs are more
likely to favor large-cap stocks, which
constitute a highly efficient market that
is challenging for stock-pickers. If there
is less ability for an actively managed
large-cap fund to beat its benchmark
than other types of stock funds, is there
a need for such a semi-transparent ETF?
• ANTs may be less tax-efficient thantraditional ETFs because they do not havethe ability to use custom redemption baskets and they will likely have less turnover.Both can curtail a portfolio manager’s ability to choose the most tax-efficient sales.
• ANTS potentially have wider bid-ask spreads than traditional ETFs due toless information disclosed in the marketsetting their prices along and expectedlower volumes.
Johnson concludes that “ANTs have aplace” for those who want to invest witha particular fund manager, but there aretradeoffs. In exchange for easy access andlower fees, limitations on portfolio managers can make ANTs less tax-efficient andmore costly than traditional ETFs.
Bernice Napach can be reached at
By Bernice Napach
The Pros and Cons of Nontransparent
Here’s an inside look on why and why not these new investment
vehicles might be right for advisors.
ANTS on the Menu
Ticker Inception Date Fee Assets ($ Mil.)
American Century Focused
Dynamic Growth ETF FDG 3/31/2020 0.45 160.4American Century FocusedLarge Cap Value ETF FLV 3/31/2020 0.42 80.4American Century Mid CapGrowth Impact ETF MID 7/13/2020 0.45 5.0American CenturySustainable Equity ETF ESGA 7/13/2020 0.39 64.4Clearbridge Focus Value ETF CFCV 5/27/2020 0.50 2. 8Fidelity Blue Chip Growth ETF FBCG 6/2/2020 0.59 38. 3Fidelity Blue Chip Value ETF FBCV 6/2/2020 0.59 7. 6Fidelity New Millennium ETF FMIL 6/2/2020 0.59 6. 1