Active semi-transparent ETFs: Ready to launch?

Mar 24th, 2021 | By | Category: ETF and Index News

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By Matthew Schiffman, Principal, Distribution Insight at Broadridge.

Matthew Schiffman, principal for Distribution Insight, Broadridge Financial Solutions.

Matthew Schiffman, Principal, Distribution Insight at Broadridge.

The 2019 SEC rule 6c-11 accelerated the expansion of ETFs, allowing for a consistent and transparent regulatory framework. For advisors and investors, lower cost and tax advantages are propelling this trend forward. Our research indicates that nearly a quarter of advisors are likely to use active semi-transparent ETFs (ASTs) within the first 12 months of being introduced.

However, the decision to convert or launch an AST is complex. For proactive distribution leaders, ASTs offer excellent opportunities to capture new assets and accelerate growth. The ability to streamline compliance and market effectively is critical to any successful ETF launch or conversion plan. Three specific steps can help future-proof your ETF strategy.

  1. Navigate compliance

Rule 6c-11, commonly known as the ETF rule, permits ETFs to come straight to market faster – eliminating the time and cost associated with acquiring an exemptive order. By replacing hundreds of customized exemptive orders, the SEC sought to standardize regulation practices with the goal of facilitating greater competition and innovation.

The decision to launch or convert to an ETF is complex – a decision that’s unique to a firm’s infrastructure and business goals. Effective legal consultation is critical to ensure all potential factors have been evaluated. There are two conversion pathways: a direct conversion or merger. The direct conversion route entails amendments to fund documents and registration statements as needed. In the case of a merger, the process is initiated with a shell ETF that enables an existing mutual fund to transform into the new ETF.

The rise of ASTs is projected to reshape the market. There is a distinct difference in the level of transparency between traditional ETFs and ASTs. While passive ETFs must disclose holdings on a daily basis, ASTs are only required to disclose holdings on a monthly or quarterly basis, with a lag. This distinction is an attractive option to active managers who prefer to conceal their investing strategies.

The threat to mutual funds is apparent: 63% of advisors indicate they would draw assets away from active mutual funds to ASTs. To mitigate the potential risk of losing market share, asset managers may consider converting brand-name open-end funds into ASTs.

  1. Educating advisors is key to a successful AST ETF strategy

More than four-fifths (82%) of advisors are interested in learning more about ASTs and ETFs. However, many still have concerns so a thorough understanding of barriers to adoption is essential. Our research indicates five primary areas where proactive asset managers can bridge the educational gap:

  • Transparency. Asset managers have a valuable opportunity to improve advisor understanding of the differences in transparency between traditional ETFs and ASTs.
  • Performance. As a relatively new class of ETFs, ASTs have a limited performance track record. Asset managers can offer insight into how their AST products may perform by demonstrating their performance with similar investment vehicles such as mutual funds and SMAs.
  • Costs. As advisors compare cost advantages, asset managers can seize the opportunity to help advisors determine which class of ETFs are best suited to meet the needs of their clients.
  • Trading Volume. Common metrics used to select mutual funds are not always the best indicators of ETF liquidity. For ETFs, assessing the liquidity of the underlying assets offers more insight than the average daily trading volume. Educating advisors about these important distinctions will add value beyond the investment product.
  • Investor education. Advisors have expressed difficulty in explaining ASTs to their clients. Asset managers can provide customized educational content to better equip advisors to effectively communicate with their clients.

As ETFs reshape market dynamics, asset managers have an opportunity to explore ASTs as a part of their product mix and go-to-market strategy. Educating investors and advisors is a critical success factor.

  1. A data-driven marketing approach

While very few ASTs exist today, a data-driven marketing approach can help you ensure a successful launch.

  • Score the potential of your ideal advisor targets. Data offers insights that traditional prospecting approaches don’t. For example, the ability to score advisor potential requires a grasp of behavior and performance patterns that only data intelligence can reveal. Effective scoring enables you to identify advisors who have the highest potential to sell ASTs or those who already demonstrate strong performance in the ETF marketplace. In fact, 55% of advisors express greater confidence in exploring ASTs if offered by a trusted asset manager.
  • Segment and map the buying journey. Segmentation and journey mapping are other ways to strengthen relationships with advisors. This strategy is most effective when it’s based on advisor needs rather than channel and sales volume. Add value by improving advisor understanding of AST products, enhancing your ability to persuade advisors to move into your ETF. Map out a journey for your advisor education programs with clear steps and milestones along the way, so advisors clearly see how ASTs can benefit their clients.
  • Track market share. You can better determine where to sell more of your products when you start with market intelligence. While mutual fund data is widely available based on historical market performance, ASTs are still relatively new. Start by identifying ASTs as you track market share; monitor data on the growth potential of your products and the performance of competitors. This will help determine the opportunity for ASTs in your product mix and the industry, and help you pinpoint when your AST is ready for launch.

Data informs every aspect of a successful AST launch. The right depth and breadth of high-quality data, coupled with powerful analytics, will provide the actionable insights asset managers need to gain and maintain a competitive advantage.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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