SEC Gives 4 Firms Final Approval for Nontransparent ETFs

Unlike traditional ETFs, nontransparent or semitransparent ETFs, as they are variously called, do not disclosure their holdings daily, allowing active fund managers to keep others from knowing their so-called "secret sauce" and prevent front running or copying their holdings.

The four models that received SEC approval this week will disclose their holdings quarterly, with a lag, and publish a proxy basket in the meantime. More such ETF filings are expected.

"Nontransparent exchange-traded funds (ETFs) are gaining product development mindshare, but whether they prove an attractive distribution opportunity remains to be seen," according to a new report from Cerulli Associates.

Cerulli says almost half of ETF issuers state they are currently developing or planning to develop nontransparent active ETF products, which would be "a momentous shift" in a market "where only approximately 2% of assets are currently actively managed."

"Nontransparent active ETFs are a logical progression as the existing ETF market moves beyond passive exposures," comments Dani Shapiro, associate director of product development. They provide ETF providers, under pressure from fee compression and product proliferation, another avenue to earn fees, according to Cerulli.

Investors and advisors who want to invest in active funds "will like the tax benefits and likely lower costs these ETFs will provide relative to active mutual funds," says Todd Rosenbluth, head of ETF and mutual fund research at CFRA.

— Check out SEC Proposes New Rule to Ease the Market Entry of Leveraged ETFs  on ThinkAdvisor.