The year 2022 will be pivotal for active exchange-traded funds (ETFs) as industry participants believe that active ETF opportunity – more so than the strategic beta or passive one – is currently the most significant.
A recent survey finds that 70% of polled ETF issuers are either currently developing or planning to develop transparent active ETFs, according to Cerulli Associates.
With US$266 billion in assets encompassing multiple asset classes and a consistent growth trajectory, transparent active ETFs are already a well-built category, Cerulli says. However, out of US$104 billion in active equity exposures, only a sliver is in true active equity products while a significant portion is allocated to thematic and strategic-beta-like offerings.
Managers can also be successful with semi-transparent offerings. Fifty percent of polled ETF issuers either are currently developing or planning to develop semi-transparent active ETFs, with issuers coalescing around the Fidelity structure – 42% say they are very likely or somewhat likely to use the structure.
Because holdings overlap and the number of holdings between the same product in two structures can vary significantly, this can lead to performance dispersion, Cerulli says. This also complicates the cost-benefit analysis, requiring additional diligence from advisers and home offices.
Mutual-fund-to-ETF conversions may serve as another avenue for managers in specific instances, namely if the product offering is a strategic fit for investors due to low cost or the type of exposure.
“The process, however, is relatively complex and poses myriad challenges,” Cerulli associate director Daniil Shapiro notes. “Managers considering launching active ETFs should also keep an eye on the dual-share-class structure used by Vanguard, which comes off patent in 2023.”
Previous Cerulli research finds that 38% of issuers are at least considering offering products via this structure. “Considering managers’ interest in offering products in a wrapper-agnostic manner, there is certainly some simplicity to be gained from having the same exposure available for sale via two structures – therein avoiding some of the previously referenced concerns about different exposures in what may be expected to be the same semi-transparent ETF,” says Shapiro.
As issuers and legacy mutual fund managers seek to identify their market entry approach – whether via launching transparent or semi-transparent product, a conversion, or dual-share-class structure – many are still taking a wait-and-see approach to see which firms win out while others are placing bets.
“Ultimately, while the transparent active opportunity may be the most significant asset-gathering opportunity, managers can also be successful via semi-transparent ETFs with the right distribution approach,” says Shapiro. “Conversions should be considered in unique circumstances, while developments regarding the dual-share-class structure should be monitored.”