Actively managed exchange-traded funds (AMETFs) are gaining traction as South African investors seek more dynamic and potentially higher-return opportunities. Unlike traditional passive ETFs that track an index, AMETFs involve professional portfolio management. This entails a team of experts actively researching securities, analysing market trends, and leveraging proprietary models. The growing popularity of AMETFs internationally has sparked a lively discussion about portfolio transparency. Unlike traditional index-tracking ETFs, which follow clear, predefined benchmarks, AMETFs are guided by the expertise of fund managers, who aim to outperform the market.
With this active approach comes the question: How transparent should AMETFs be about their portfolio holdings?
Pictured: Niki Giles, Head of Strategy at Prescient Fund Services
Transparency options for AMETFs
There are essentially three different transparency options, depending on where they are issued and the preference of the fund manager. These are:
- Transparent: Disclose all portfolio holdings and their weights on the manager's website daily.
- Semi-transparent: Disclose holdings monthly or quarterly and may also release "proxy portfolios" that may not include all holdings.
- Non-transparent: Only required to disclose their holdings quarterly or monthly.
Regional approaches to transparency
United States
Regulatory requirements dictate that most ETFs, including actively managed ones, disclose their holdings daily, giving investors real-time insight into the assets they own. However, some actively managed funds view daily transparency as a double-edged sword: while it fosters investor trust, it also exposes a fund manager’s strategy, making it more vulnerable to being replicated by competitors or front-run by traders.
To address this, the US Securities and Exchange Commission (SEC) approved a new class of "semi-transparent" or "non-transparent" ETFs in 2019. These funds are required to disclose their holdings quarterly rather than daily, balancing investor demand for insight with the need to protect proprietary strategies. This model has proven popular and has expanded the AMETF market, attracting investors who value the security of knowing what they hold without compromising fund managers’ competitive edge.
Europe
The transparency requirements differ from country to country. Some regulators, like the French Autorité des Marchés Financiers, have recently relaxed the transparency rules, and semi-transparent ETFs are now required to publish holdings “at least once a month.” Issuers may share the daily composition of their portfolios with contracted market makers but must simultaneously distribute this information through the same channel to all relevant parties, reducing the risk of front-running.
On 19 December 2024, Luxembourg's Commission de Surveillance du Secteur Financier published an FAQ providing for the possibility to defer the disclosure of an AMETF portfolio composition. This information is required to be published at least monthly.
Meanwhile, the Central Bank of Ireland is also looking at relaxing its transparency rules for AMETFs.
South Africa
The AMETF market is still in its infancy, with the Johannesburg Stock Exchange (JSE) only allowing listings since 2022. As in Europe, South African fund managers are cautious about sharing too much information, given concerns about strategy replication and market impact. The JSE has allowed fund managers the choice of either transparent or non-transparent AMETFs, where holdings are only required to be disclosed on a quarterly basis, but intra-day Net Asset Values (iNAVs) must be published at least three times a day.
The benefits of semi-transparent or non-transparent AMETFs
- New market adaptation: Quarterly disclosures provide enough information for investors while allowing fund managers to innovate.
- Reduced managerial pressure: Less frequent transparency gives managers room to focus on their strategies.
- Protection from front-running and replication: Semi-transparent ETFs help protect investors from other traders jumping ahead of the fund’s trades or copying its strategy.
- Access to equity capabilities: Many fund managers are hesitant to adopt AMETFs due to transparency concerns and may be more willing to offer equity capabilities through semi-transparent options.
The benefits of transparent AMETFs
- Efficient pricing: Daily transparency has been tied to an efficient arbitrage mechanism, resulting in narrower premiums and discounts, tighter spreads, and better liquidity as market makers know precisely the composition of the basket of stocks within the ETF.
- Investor confidence: Full transparency allows investors to see exactly where their money is allocated, enhancing trust and satisfaction. This is particularly appealing during periods of market volatility.
- Regulatory compliance: Transparent ETFs meet stringent regulatory requirements, making them more accessible to a broad range of investors
- Simplified monitoring: Investors can more easily track their portfolio's performance and risk exposure by reviewing the disclosed holdings, ensuring alignment with their investment strategy.
- Market stability: Transparency contributes to overall market stability by providing consistent and reliable information to participants.
Balancing transparency and investor needs
While transparency builds trust, allowing investors to understand risks and track their investments, especially during market volatility, excessive transparency can expose fund managers to competitive risks. AMETFs need continuous innovation to outperform benchmarks, and daily transparency may lead to strategy replication or short-term decisions that hinder long-term growth.
The level of transparency that investors require often depends on their priorities. Retail investors may not always need real-time insights into an ETF’s holdings, especially when iNAVs can help them assess whether the ETF is trading close to its fair value.
Investors need to assess which level of transparency aligns with their investment goals and risk tolerance. Those seeking real-time accountability may prefer transparent AMETFs, while those focused on long-term returns might find semi-transparent or non-transparent ETFs more suitable.
The landscape of AMETFs reflects the broader trend toward customisation and choice in investing. By understanding the trade-offs of each structure, investors can make informed decisions that best align with their financial objectives.
About Prescient Fund Services
For successful asset managers looking for a reliable and trusted investment-related platform an administration partner, Prescient Fund Services is a full-suite fund services firm whose commitment to enduring relationships, consistent excellence and real results has been a constant behind global investing success for the past 20 years.
Disclaimer:
Prescient Fund Services (Pty) Ltd is an Authorised Financial Services Provider (FSP 43191). For more information visit www.prescient.co.za.
