The U.S. Securities and Exchange Commission’s approval in 2019 to allow actively managed exchange-traded funds to offer comparable strategies that are available with mutual funds resulted in the launch of active semi-transparent ETFs.
Edward Rosenberg, senior vice president and head of ETFs at American Century Investments, a Kansas City, Missouri-based asset manager that also operates as a mutual fund and ETF issuer, discussed active ETF structures, the evolution of the ETF industry and how to trade them at the Schwab IMPACT 2020 conference. Here are the key points:
— The history of ETFs.
— New ETF strategies.
— Trading strategies for ETFs.
History of ETFs
The first ETF launched in the U.S. was passively managed. From when the SPDR S&P 500 ETF Trust (ticker: SPY) debuted in 1993 by State Street Global Advisors, a Boston-based asset manager, it took the industry 15 to 16 years for ETFs to become commonly used, Rosenberg told attendees at IMPACT 2020.
Today, there are $5 trillion in assets in ETFs in the U.S. alone.
“That is tremendous growth in 10 years and assets have gone up five times,” he said.
The first actively managed ETF was launched in 2008 by Bear Stearns Asset Management. The launch of the Bear Stearns Current Yield Fund (AMEX: YYY) was announced on March 10, just several days before the Federal Reserve Bank of New York and JPMorgan Chase ( JPM) said they would provide an emergency loan to keep Bear Stearns solvent. The ETF was shut down by October 2008.
In 2010, U.S. ETFs hit a trillion dollars for the first time. Investors learned that picking individual stocks in 2008 was often more difficult than picking an entire sector. ETFs began picking up volume and started becoming a household name.
“Finding winners was hard and people found that individual securities were harder to pick,” Rosenberg said. “That was the beginning of where volume started to decline on equities and the beginning of ETFs starting to take up market share.”
The majority of actively managed ETF strategies are in fixed income, including the ones with the most assets. “It makes sense to go active,” he said. “Across the board it’s really difficult to replicate an index in fixed income anyway.”
Portfolio managers have to make active decisions to figure out which bonds they should buy, how the duration impacts the yield and how it matches up against the index.
The amount of assets in actively managed ETFs is now only $137 billion, which is a small portion of the overall ETF industry, Rosenberg said.
The first semi-transparent ETF using both the NYSE Active Proxy Structure and T. Rowe Price’s proxy model went public during the third quarter of this year.
“In the world of ETF opportunities, we continue to see significant growth across actively managed ETFs … marking yet more milestones for this rapidly growing part of our industry,” Douglas M. Yones, head of exchange-traded products at the New York Stock Exchange, wrote in a blog post. “Based on current public filings, we’ll likely see several new ETFs using the many semi-transparent models available launch before the end of the year.”
Investor demand has been high, and the first 15 semi-transparent ETFs raised more than $600 million in assets under management in a few months this year, according to Yones.
New ETF Strategies
New strategies have launched recently in equity ETFs, including the semi-transparent ETFs in 2020. The largest difference between a semi-transparent and transparent ETF, which also launched in 2020, is limiting the timing of the disclosure of the holdings. For instance, American Century shows the holdings quarterly with a 15-day lag for semi-transparent ETFs and reveals the top 10 holdings monthly with a 10-day lag for transparent ETFs.
These strategies are designed to provide alpha, and these ETFs are available from American Century, Legg Mason, Fidelity and T. Rowe Price. The assets are small but increasing — when they launched in August, there was only $500 million in assets, but it has grown to $620 million.
The goal of investing in active ETFs is to achieve alpha and outperformance of a specific index. ETFs can have less cost built into them, which makes them cheaper than a mutual fund and creates a more tax-efficient portfolio.
The ability to buy and sell ETFs throughout the day outweighs investing in a mutual fund, which only receives the end-of-the-day price.
The creation size is a lot smaller in semi-transparent ETFs, and most are 5,000 share minimums compared with traditional ETFs, which run from 25,000 to 50,000 shares and can impact the spreads.
“These function as well if not better than most ETFs out there during that time (during the pandemic),” Rosenberg said. “These ETFs have functioned spectacularly since they have launched no matter who’s put them out there and how much they have traded.”
Trading Strategies for ETFs
The same trading strategies for traditional ETFs should also be used for semi-transparent active ETFs. Rosenberg recommends that financial advisors or investors avoid trading in the first 15 minutes to wait for all the underlying securities to open or the last five minutes when the market is open. Another tip is to try to trade ETFs with international exposure when those specific markets are open.
Investors should use limit orders when buying and stop limit orders when selling because otherwise they wind up as market orders and “generally push those prices lower as well,” Rosenberg said.
He also recommends leveraging a block desk for large orders. Speak with the ETF sponsor before buying or selling large quantities of an ETF. Most ETFs have a capital markets desk and leveraging them and asking questions about a potential trading strategy is a good idea. If you’re an advisor trading on a main platform, use the institutional trading desk and not-held order or call directly, he said.
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Actively Traded ETFs Now Include Semi-Transparent ETFs originally appeared on usnews.com