2022 will be a transitional year for active exchange-traded funds (ETFs), according to Cerulli Associates. Its latest research U.S. Exchange-Traded Fund Markets 2021: Reaching a Growing Investor Base finds ETF industry participants are adamant that the active ETF opportunity is currently the most significant. In this context, as managers look to bring active product to market, they should continue monitoring the various approaches to launch and understand the tradeoffs associated with each.
The research asserts that the transparent active opportunity is most attractive relative to semi-transparent, strategic beta, and passive offerings. 70% of polled ETF issuers are either currently developing or planning to develop transparent active ETFs. With 266 billion dollars in assets encompassing multiple asset classes and a consistent growth trajectory, transparent active ETFs are already a well-built category and development has more recently been spurred by the ETF rule.
However, Cerulli notes that out of 104 billion dollars in active equity exposures, only a sliver is in true active equity products given that a significant portion is allocated to thematic and strategic-beta-like offerings.
The research points out that managers can also be successful with semi-transparent offerings. 50% of polled ETF issuers either are currently developing or planning to develop semi-transparent active ETFs. “Because holdings overlap and the number of holdings between the same product in two structures can vary significantly, this can lead to performance dispersion. This also complicates the cost-benefit analysis, requiring additional diligence from advisors and home offices”, Cerulli explains.
“Managers considering launching active ETFs should also keep an eye on the dual-share-class structure used by Vanguard, which comes off patent in 2023,” according to Daniil Shapiro, associate director. Previous Cerulli research finds that 38% of issuers are at least considering offering products via this structure. “Considering managers’ interest in offering products in a wrapper-agnostic manner, there is certainly some simplicity to be gained from having the same exposure available for sale via two structures—therein avoiding some of the previously referenced concerns about different exposures in what may be expected to be the same semi-transparent ETF,” adds Shapiro.
Cerulli believes that as issuers and legacy mutual fund managers seek to identify their market entry approach—whether via launching transparent or semi-transparent product, a conversion, or dual-share-class structure—many are still taking a wait-and-see approach to see which firms win out while others are placing bets.
“Ultimately, while the transparent active opportunity may be the most significant asset-gathering opportunity, managers can also be successful via semi-transparent ETFs with the right distribution approach. Conversions should be considered in unique circumstances, while developments regarding the dual-share-class structure should be monitored”, concludes Shapiro.