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June 8, 2020, 4:50 p.m. EDT

The ‘ANTs’ came marching: how have active, non-transparent ETFs performed so far?

First movers in the space help erode old categories, and analysts say they’re interested to see what comes next

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By Andrea Riquier


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Are ETFs meant to be active or passive, transparent or opaque, or all or none of the above?

One by one, a new crop of exchange-traded funds has been making its way into the marketplace. After two months in business, the new “actively managed, non-transparent” ETFs have performed about as well as analysts expected — with a few surprises — and are setting the stage, some observers say, for a fund marketplace that moves beyond existing categories to bring broader choices to investors.

As a reminder, actively managed, non-transparent ETFs have been in the works for some time. ETFs offer investors many benefits when compared with mutual funds, including full transparency into their portfolio holdings, but many active money managers chafed at the idea of immediately disclosing what they’re buying and selling.

Read: What is a non-transparent ETF and why would anyone want to own one?

Late in 2019, the U.S. Securities and Exchange Commission gave its blessing to some “ANT” structures that used various workarounds that would allow such funds to trade as traditional ETFs do, while only being required to disclose their holdings once a quarter. On April 1, American Century Investments debuted two such funds, the Focused Dynamic Growth /zigman2/quotes/217737721/composite FDG +0.89%  and the Focused Large Cap Value ETF /zigman2/quotes/217737737/composite FLV +0.61% . ClearBridge Investments also launched the ClearBridge Focus Value ETF /zigman2/quotes/218669428/composite CFCV +0.29%   in the final week of May, or too late for any meaningful analysis for the purpose of this story.

“They’re functioning exactly as they should,” said Todd Rosenbluth, head of ETF and mutual fund research at data provider CFRA. “Assets are incrementally building, though at a slower pace than I would have expected.”

In many cases, Rosenbluth pointed out, fund managers launching fund products that are seen as a gamble in some way, often line up assets in advance, often by moving them from one segment of the larger company to the new venture. As previously reported, fund managers can face a vicious cycle when it comes to new launches: investors are usually attracted to products that already have assets.

Related: More evidence that passive fund management beats active

While most observers say ETFs spent the tumultuous month of March not only performing better than other securities, but also carrying the financial markets on their back, it’s still the case that American Century launched its two offerings into a jittery marketplace.

The issues that came out of the volatility of the early spring are exactly what Ben Johnson, director of passive strategies at Morningstar, has in mind when he considers ANTs’ opacity. End investors “don’t care to know the makeup of the funds on a daily basis,” Johnson said, adding that market makers in the background do.

ETFs rely on institutional investors known as “authorized participants” to keep an equilibrium between the share price of the fund and the prices of the securities underlying the fund. That job gets a lot harder if they don’t know what the securities are.

“Not having a live look-in on the exact makeup of the portfolios creates incremental risk,” Johnson told MarketWatch. “The market makers will have a harder time and spreads will be wider and volumes will be lower. There’s a risk as an investor that you might be giving back a significant amount of the upside.”

See: It’s ‘no fun’ to be a small fund manager most of the time, Jan van Eck says — but right now is an exception

Johnson is biding his time before rendering an assessment of how well the first movers are performing, but Rosenbluth is happy to call the performance “strong.” The growth fund has gained 31% in its first two months of existence, compared to a 22% increase for an index fund tracking the Russell 1000 Growth Index /zigman2/quotes/202261664/composite IWF +0.47%  , and the value fund gained about 14% compared to 15% for a Russell 1000 Value /zigman2/quotes/206232959/composite IWD +0.51%   tracker. In that time, the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.45%   is up 24%.

But for disrupters like these, both analysts say they’re interested in more than just performance. The early days of the ANTs could provide an intriguing look inside the future of the larger fund management space, they said.

Johnson thinks the rise of ANT-like structures could upend the traditional mutual fund space. MarketWatch reported in April that industry participants were girding for asset managers to convert existing mutual funds to an ETF structure, and in late May Guinness Atkinson said it planned to do just that .

“I’m most interested in seeing how T. Rowe Price’s funds pan out,” Johnson said. The firm received SEC permission to create funds using their own non-transparent structure, and plan to launch ETFs that replicate their existing mutual funds. “It will be a tidy experiment,” Johnson said, “a side-by-side lineup of funds with successful strategies managed by solid teams backed by a firm that’s reputable and that we think highly of.”

In contrast, Rosenbluth is watching the active management space. “I’m intrigued that we’ve seen a host of new fully transparent active ETFs,” he told MarketWatch.

In March, Truemark Investments launched a pair of funds, the Technology, AI and Deep Learning ETF /zigman2/quotes/216717993/composite LRNZ +0.46% , and the ESG Active Opportunities ETF /zigman2/quotes/216717970/composite ECOZ +0.28% .

And at the end of May, JPMorgan launched the JPMorgan Equity Premium Income ETF /zigman2/quotes/218574472/composite JEPI +0.19%   and the JPMorgan International Growth ETF /zigman2/quotes/218574439/composite JIG +1.06% , touting them as “active transparent” funds.

Read next: Are ETFs safe... for retail investors?

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Andrea Riquier reports on housing and banking from MarketWatch's New York newsroom. Follow her on Twitter @ARiquier.

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