When the Securities and Exchange Commission approved the first structure for a nontransparent ETF in May 2019, the decision was hailed by some as a breakthrough for asset managers of actively managed funds.
That’s because ETFs using these structures can delay disclosure of their holdings, unlike traditional ETFs, which must reveal their holdings daily. Asset managers of nontransparent ETFs, also known as semi-transparent ETFs, can keep their “secret sauce” hidden from competitors and avoid front running.
Now Fidelity Investments, which has three such ETFs and is licensing its semi-transparent structure, has released a research report that lauds the benefits of these ETFs for investors as well.
Reducing the odds of front-running reduces the odds that a security being bought by a fund would be bid up in price, which would potentially decrease the return of that strategy, according to Fidelity.
Less front-running also gives portfolio managers the time they need to manage cash flows and shift capital out of existing holdings into new ones in order to maximize alpha, which also benefits investors, according to the Fidelity report.
Portfolio managers of nontransparent ETFs can more easily extend the duration of a transaction from days to weeks, which “could cut the cost of a trade by half — leading to savings that could explicitly benefit shareholder returns,” according to the report.