Active nontransparent ETFs: Doing it the new old-fashioned way
When the 2020 edition of the renowned Inside ETFs conference occurred in late January, it was still several weeks before the coronavirus pandemic had established a firm foothold in the U.S. and caused an unprecedented economic shutdown. One of the most prominent themes of the conference proved to be the concept of active nontransparent (ANT) exchange-traded funds and the impact these innovative new investment vehicles might have upon being officially introduced.
Nontransparent ETFs represent a new type of actively managed investment vehicle that combines the characteristics of mutual funds (less transparency) and traditional ETFs (intraday liquidity and tax efficiency). Some in the industry see ANTs as the next iteration of active management. Others view their development as the maturation of the ETF product group. Still others even see them as a step backward. The truth is, not much is actually changing. The manager of an ANT just enjoys more discretion and flexibility.
On April 2, American Century “won the race” to launch the first-ever active nontransparent ETF. Like other firms including T. Rowe Price and Fidelity, American Century is utilizing Precidian Investments’ structure called ActiveShares®.
Looking back a few months to Inside ETFs, when conferences were still being conducted in person rather than through Zoom, the conversations I had regarding new ANTs didn’t focus much on the potential effectiveness of the concept or alpha that could be scored. Instead, they were more along the lines of, “Who is going to invest in one over a low-fee Vanguard fund?” and “Why would I park my money in a pseudo-mutual fund when I can get the same performance in a passive, transparent ETF?”
Importance of Marketing
These were fair questions, and the performance debate will surely rage until the products have established more of a track record. But the real success of active nontransparent ETFs as a product category could come down to something else: marketing. In today’s environment, how do you market a fund that does not disclose its holdings daily, offers fund managers latitude in the underlying asset classes and charges more than index-tracking passive funds?
Strategic execution on the part of the respective fund manager or management team will be pivotal. This harkens back to the days when fund managers, and their impressive auras, could attract investor dollars and maintain the performance to keep them there.
Nontransparent ETFs might usher in the return of star fund managers fueled by skilled stock-picking, cutting-edge algorithms and intensive bottom-up research. Performance will sell, just like with any other investment. What could also make a difference is how you tell the story of your investment team and approach.
I’m not saying nontransparent ETFs will spotlight the next Warren Buffett or Peter Lynch. But the best way to capture a wider, possibly more skeptical, audience is to offer consumable content that provides viewers with a peek behind the curtain at who’s actually managing the money. Forgoing transparency is the trade-off these investors will make, in the hope of capturing strong performance through an actively managed investment process.
Here are three important considerations for those who are looking to grow in the ANT world:
1. Help investors understand your fund positioning and strategy through video and text. Connecting with prospects and investors is a key to gaining trust. Even better is using video and text to help them understand your thought process and investment thesis on a consistent basis. You don’t have to explain every detail, but a concise video that encapsulates your current strategy (not underlying holdings) will help prospects and investors connect the dots between that strategy and their investment goals. Frequent updates can offer these audiences a steady stream of content to consume.
2. Leverage your niche to your advantage. Individual nontransparent ETFs will likely target a specific sector or set of sectors to focus on. While you might think this will limit your potential audience, you can still tap into a broad range of potential investors if you market your niche strategy properly. Some ideas that could help include:
- Identify a content plan (e.g., blogs, contributed pieces). It’s important to build a repository of material that prospects can use to get up to speed on your thinking or otherwise uncover through their own research.
- Build a network online. Connect with people who might be interested in learning about your approach on LinkedIn. Share relevant information and comment (a very underused feature on Twitter for topical posts). Start a channel on outlets like Seeking Alpha or Financial Advisor IQ that accept published content for free.
- Contribute to media outlets. You’re likely an expert in your space, and either track or have access to information that others might not. By sharing that knowledge through media interviews, you will not only establish third-party credibility as a quoted source in news outlets, but also educate interested readers in a way that might spark them to further explore your offerings.
3. Know your prospects’ portfolios. Understand that everyone has a slightly different portfolio and nontransparent ETFs would play a supplemental role in the majority of portfolios. Actively managed funds are likely to fill an “in-between” space, using specific strategies to tap into a unique sector or hedge, or to generate income. Identify the goal of your fund and its strategy, then market with those concepts in mind. For example, an active strategy can fit well as a complement to a low-cost diversified core. Keeping a portion of one’s account in an inexpensive smart beta (or traditional beta) core position and then adding active strategies on the edges may make a lot of sense. The more time you spend helping people understand how your portfolio is a piece of the puzzle rather than the whole, the more likely you are to get their buy-in.
Being first is key with new products. Of course, there are potential risks, but American Century is the leader right now. That doesn’t mean they stand to dominate for the rest of time. New ANTs will come to market in the coming months, and unique strategies and niches will steal market share.
Over the long term, as we have seen with many of our ETF clients, distinguishing yourself as an expert and thought leader will be crucial to raising assets. It’s important to stand out for the right reasons. Remembering the superstar stock-pickers and fund managers of years past, I imagine we will see a return to some type of manager-centric marketing. It’s not like you can advertise the funds’ holdings anyway, so focus on building trust and credibility elsewhere!