Actively managed non-transparent ETFs (ANTs) are the newest entrants to the ETF space and are already gaining traction with investors. So far, American Century, Clearbridge/Legg Mason, Fidelity, and T. Rowe have announced new ANTs, with others in the pipeline for later this year.
ANTs have some obvious benefits over actively managed mutual funds - the ETF structure provides greater tax efficiency, lower costs, and intraday pricing. These benefits led some analysts to suggest early on that some active managers might phase out mutual funds completely in favor of ETFs. But a complete pivot away from active mutual funds is unlikely. Both regulators and managers are taking a cautious approach that suggests that ANTs will remain alongside mutual funds without supplanting them completely.
‘For us, it’s about investor choice,’ said Tim Coyne, head of ETFs at T. Rowe Price. ‘ETFs work well in a lot of portfolios, but there are taxable accounts and retirement plans that aren’t going to be able to change over easily. Some investors may prefer to stick with what they have. We already offer strategies in mutual funds and investment trusts, ETFs are just an extension of that approach. Investors and advisors can pick what works best for their goals.’
In July, T. Rowe got final regulatory approval to launch four ANTs focused on US equities a Blue Chip Growth ETF; Dividend Growth ETF; Equity Income ETF, and Growth Stock ETF. All four ETFs replicate existing T. Rowe mutual funds and are offered at around the same price as the cheapest share class of the mutual funds. Coyne said that this first round of funds will serve as a proof of concept of sorts for ANTs at T.Rowe and in the market.
While regulators have approved the overall ANT structure, so far they’ve kept the strategies limited to US equities. Expanding to US credit is likely possible over the medium term but, everyone Citywire spoke to for this article noted that regulators and investors alike are taking a ‘wait and see’ approach to ANTs. It was an eight-year process to get ANTs approved, so it’s unlikely that any and every strategy is going to get rubber stamped without a few products in the market building a track record and attracting assets first. This cautious approach is likely to forestall any great pivot out of active mutual funds and instead points to a gradual year over year shift.
‘There’s a bit of a herd mentality to some of this,’ said Kip Meadows, CEO of fund administrator Nottingham Company. ‘People are going to watch what these bigger firms do and how it goes. Ultimately, these are products that are supposed to do better than the benchmark, and it’s an interesting time to try to do that.’
In August, Nottingham Company was approved by the SEC to start offering white-labeled ANTs using the Blue Tractor ‘Shielded Alpha’ methodology. Meadows said Nottingham has a pipeline of active mutual fund managers that are in the process of creating ANTs for their strategies. But, whether investors ultimately adopt the product is going to come down to the usual metrics for active management - performance, manager quality, portfolio goals, and differentiation of the strategy.
‘We ask managers upfront whether they have a market for this product and if they don’t, then they are going to have to be prepared to cover the funding costs in the interim. ETFs are easier to set up than mutual funds, but they aren’t free. There is a lot of nuance embedded in how these products ultimately come to market,’ he said.
For star managers, answering that question may be easy. The active managers and brands in the first round of ANTs are well known to advisors and investors, which is likely to engender some trust. Looking at mutual fund performance as a proxy for what the ANTs might do can also provide additional data.
Lesser known funds will have to lean harder on marketing and be able to show consistently positive performance.
‘When you think about active, the important thing is not just the benchmark,’ explained Deborah Fuhr, managing partner and founder of ETF research shop ETFGI. ‘Most providers can run an index ETF, it’s pretty straightforward. With active, investors are paying more and they’re going to expect a strategy and a manager that can outperform with at least $100m in a fund.”
Like Coyne, Fuhr expects that these funds will come alongside existing options in a lineup rather than overtaking mutual funds or even transparent active ETFs. For smaller firms, offering an ANT may make it easier to attract new investors, as adding an ETF to a portfolio - even an ANT - is cheaper and easier than a mutual fund. But ultimately, as with all active management, performance is key. An underperforming fund is still an underperforming fund even if it costs less, and investors aren’t likely to stick around for that.