ETFs are clearly all the rage garnering assets at a record clip, with total AUM now eclipsing $2.5 trillion, and they may have just gotten a boost from the SEC that will further increase the pace of asset gathering. Twenty-one years after the launch of the first ETF, the SEC has just granted permission to Eaton Vance to launch a series of non-Transparent ETFs. These new vehicles will trade on exchanges just like traditional ETFs, but they will not be obligated to disclose the holdings and they don’t necessarily have to follow an index. Is this a good development?
I was fortunate to be involved in the launch of the ETF industry’s first active ETF in April 2008, when the INVESCO Quant team brought to the market through Power Shares the R200 Mega Cap enhanced index product. We understood that this ETF would have to be transparent, and as a result, we deliberately went with the R200 since we were already managing an S&P 100 enhanced index product for an institutional client.
I believe that the SEC’s decision to grant investment managers permission to launch ETFs with no transparency is a mistake. These active strategies are designed to mirror institutional product, with the hope that they will provide an excess return relative to an index over some specified period of time. Allowing these strategies to trade on exchanges daily defeats the purpose of “investing” in these products. Active strategies should be bought and held so that the strategy can actually produce an excess return. If investors want the beta that come with these products they would be much better off just buying the index. Paying more for these active strategies, with no transparency, and then trading them regularly just doesn’t make sense.
We’d love to get your thoughts on this subject.