Active ETF Interest Continues to Grow
At this point, most everyone has read the news regarding the iShares active ETF exemptive relief. While it’s very exciting news, I am not sure much will come from it soon. It seems there has been a big rush from some of the largest asset managers, to obtain active ETF capabilities from the SEC (for those of you that don’t know, you need special approval from the SEC to offer actively managed ETFs, which can take up to 2 years, and can be quite expensive in legal costs).
Our take is that many of these large firms are seeking to obtain this capability “just in case” active ETFs demonstrate the ability to draw significant assets from traditional mutual funds. What many of these firms will struggle to deal with is some of the contradiction in their existing models. Either passive versus active, or for other traditional mutual fund managers, transparency versus non-transparency.
What is interesting for us is that iShares has been in the active ETF space with ALT, the Diversified Alternatives Trust. Actually, it’s an ETP, not an ETF, so it does not have some of the shareholder protections that true ETFs have under the 1940 Act (basically ETPs and ETFs are overseen by the SEC under different regulatory and operational rules). So, you might be surprised with all of the news this week about the iShares exemptive order, and their ability to offer true ETFs (versus ETPs) they didn’t tell someone in the media “we are already in the active space”, in fact, they really didn’t say anything.
We think that will be their strategy for a while. They have done an amazing job establishing their brand with index-based ETFs, that coming out with an active message might provide a significant amount of confusion. How do you extol the virtues of active management being known for indexes?? It’s possible, you just have to follow the Vanguard model, don’t advertise you are in the space. Quietly build great strategies, grow assets through an experienced and talented sales force (and raise a lot of assets if the strategies perform). Our view is this will likely be the same for some of the other larger money managers who wrestle with transparent and non-transparent products.
Regardless as a firm already in the active ETF space, we are excited to see so much interest in the innovative approach to active management. It would be fair to say that these same firms did not make the same rush into passive ETFs after their second and third years of existence.