During the recent Inside ETF Conference, more than 2,300 financial advisers, institutional investors, investment managers, representatives from academia, and many other industry experts gathered in Hollywood, Florida to participate in and learn from a spectrum of forward-looking agenda topics.
Professionals from Ultimus Fund Solutions attended the four-day event, met with ETF sponsors and industry partners to talk about how the industry is evolving, and discussed what to expect in 2020. As background, Ultimus has been servicing ETFs since 2012, helping investment managers concentrate on growing their assets under administration year over year via a broad range of active and passive strategies in both proprietary standalone trusts, as well as turnkey series trust offerings.
As a follow-up to the conference, the Ultimus team shares a few key takeaways and their observations and commentary below.
Active Non-Transparent (ANT) ETFs
There was a lot of buzz surrounding Active Non-Transparent ETFs (or ‘ANTs’ as some industry colleagues affectionately refer to them). There are multiple models approved by the SEC including Precidian, NYSE, Blue Tractor, T. Rowe Price, Fidelity etc., and active managers who are seeking non-transparent vehicles, are gearing up to offer their strategies.
Many advisers of equity strategies have stayed away from traditional transparent ETFs due to concerns around market participants attempting to front-run their strategy. ANTs alleviate that concern. What remains to be seen is whether mutual fund strategies will perform any better in the ETF format or if managers will cannibalize existing assets and fees.
Active Non-Transparent ETFs will take some time to be adopted, and below are some of the logistical hurdles that still need to be considered:
- Currently, there is no generic listing standards for Non-Transparent Active ETFs at the listing exchanges, so a 19b-4 will be required to be filed for each launch – meaning additional legal fees and time for approval (approx. 6 to 9 months currently for 19b-4 approval).
- Only applicable to domestic equity strategies at this time.
- No Custom Baskets will be allowed
- This may change in the future under a new relief, but not currently under the existing relief.
- They will not be as tax efficient as an Active ETF, but still more efficient than a Mutual Fund.
- There are two different types of ANTs – Semi Transparent and Full Non-Transparent
- Limited transparency models may make adoption easier and more cost effective.
- Fully non-transparent models may incur additional compliance and operational hurdles, including the introduction of a new role – Authorized Participant Representative (APR) but will fully shield portfolio holdings.
Rule 6c-11 and Active Transparent ETFs
Investment managers not concerned with the transparency of an ETF can bring a product to market faster via Rule 6c-11. The rule provides a rescission of Exemptive Relief, allowing most prospective ETF sponsors to operate without seeking exemptive relief, which will accelerate new ETF creation. Rule 6c-11 will also help:
- Reduce Legal Costs – removal of additional filings for relief will reduce start-up and year one legal costs.
- Enable Custom Baskets – Active ETFs will be able to take advantage of Custom Baskets that were previously only allowed for Passive ETFs. This could help level the playing field between passive and active ETFs and may allow for further tax efficiencies in custom redemption baskets.
Regulation Best Interest (Reg BI)
There was quite a bit of discussion about the upcoming adoption of Regulation Best Interest (Reg BI) Rule, with some labeling it as a game-changer for Registered Investment Advisers (RIAs). This rule could be a determining factor in whether an adviser leverages a strategy in a mutual fund or ETF format. Reg BI implementation deadline is June 30, 2020.
Here are a few key facts to watch out for:
- Regulation does not apply directly to mutual funds (which are not retail clients), and it may place added pressure on adviser fees since brokers will consider a funds’ cost, including management fees, when recommending funds to retail clients.
- Regulation requires broker-dealers to act in the best interest of their retail customers when making recommendations concerning securities transactions, or investment strategy involving securities.
- Regulation requires that broker-dealers place their clients’ interests ahead of their own.
- Importantly, brokers must consider costs, but it is not the exclusive factor for assessing best interest.
For both passive and active ETF strategies, 2020 should prove to be a banner year for continued asset growth in the market. SEC approvals of non-transparent ETFs give managers more options to launch product, and the expectation is a small wave of initial launches from active managers, followed by a much larger wave of those who waited for market reaction before deciding their path forward.
Ultimus partners with investment managers to provide customized services throughout the entire life cycle of a variety of registered funds. Click here to learn more about all aspects of launching and operating ETFs. Also available is whether Launching an ETF is Right for Your Firm. Or fill out the Contact Us form at www.UltimusFundSolutions to speak to an Ultimus professionals.
ETFs are subject to market risk, including loss of principal.
8293 UFS 2/13/2020