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What Are Semi-Transparent ETFs?

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.”

What You Can Do Next

Important Disclosures

Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read it carefully before investing.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Active semi-transparent ETFs operate differently from other ETFs. Unlike other ETFs, an active semi-transparent ETF does not publicly disclose its entire portfolio composition each business day, which may affect the price at which shares of the ETF trade in the secondary market. Active semi-transparent ETFs have limited public trading history. There can be no assurance that an active trading market will develop, be maintained, or operate as intended. There is a risk that the market price of an active semi-transparent ETF may vary significantly from the ETF’s net asset value and that its shares may trade at a wider bid/ask spread and, therefore, cost investors more to trade than shares of other ETFs. These risks are heightened during periods of market disruption or volatility. 

Schwab receives remuneration from active semi-transparent ETFs or their sponsors for platform support and technology, shareholder communications, reporting, and similar administrative services for active semi-transparent ETFs available at Schwab. This fee will vary, but typically is an asset-based fee of 0.10% per annum of the assets held at Schwab.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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