ETFs
A useless innovation for investors
Non-transparent ETFs have failed to make a splash in the US and without the same tax benefits in Europe, there’s not much reason for the structure to succeed on this side of the Atlantic.
When non-transparent ETFs will be approved by the Central Bank of Ireland (CBI) has been the subject of an ongoing discussion since the regulator’s discussion paper on ETFs in 2017.
At the time, the CBI made no changes to the requirements for asset managers to disclose their ETF holdings on a daily basis.
However, an update Last year, a report by the International Organization of Securities Commissions (IOSCO) on its ETF best practices suggested the global watchdog is not bound by daily disclosure requirements.
As a result, Irish lawyers have said the CBI plans to review its daily disclosure requirement rules towards the end of this year.
“I understand that the CBI intends to examine [portfolio transparency rules]”, said Serger Dolomanov, partner at William Fry. “The industry is hoping that this will result in a broader or more flexible set of requirements, given that they are looking at them in the context of the IOSCO document.”
Despite the positive signals coming from Ireland – the dominant country for ETF domiciliation – it is not certain that there will be strong demand for this structure.
In the United States, the structure has not yet caught fire. According to Bloomberg Intelligence data, non-transparent active ETFs have seen just $2.1 billion in inflows since the start of 2023, compared to $234 billion in net new assets for active ETFs that disclose their holdings daily, at June 5.
This is a damning critique of the product structure’s popularity in the United States and shows that investors are comfortable with owning an active ETF that reveals its “secret sauce” to the market.
Additionally, Europe has seen a large number of active new ETF entrants over the past 18 months, from asset managers happy with the current regulatory environment. This includes American Century Investments, which announced its entry into European ETFs this week, AXA Investment Managers, Horizon Kinetics, abrdn and Investlinx.
“What was previously seen as a barrier to entry is certainly no longer the barrier to dealmaking that it once was,” said Ciara O’Leary, partner at Dechert. “As such, the relaxation of rules may not be seen by the market as as dramatic an event as it would have been a few years ago.”