The Securities and Exchange Commission recently approved a new kind of exchange-traded fund: the semi-transparent ETF.
Unlike transparent ETFs, whose managers are required to report their holdings daily, semi-transparent ETFs must disclose their holdings only monthly or quarterly—which allows fund managers to roll out actively managed strategies without fear of copycats or predatory traders following their every move.
“Some active managers have avoided traditional ETFs because they believe the requirement for daily disclosure would allow others to steal their ‘secret sauce,’” says Emily Doak, CFA and managing director of ETF research at Charles Schwab Investment Advisory. “This new breed of ETF allows fund managers to offer the kinds of proprietary strategies formerly reserved for active mutual funds.”
That said, less frequent disclosure of holdings could involve trade-offs. Because they often shield their holdings using proxy portfolios that resemble but aren’t identical to the fund’s actual holdings, semi-transparent ETFs may be harder to value than regular ETFs. This could cause their shares to trade with wider bid-ask spreads, particularly during periods of heightened market volatility.
“The bottom line is, it’s too soon to know how semi-transparent ETFs will stack up against their traditional peers and each other,” Emily says, “so I suggest approaching them with an abundance of caution until they have a track record to back them up.”