Actives Unlocked The ETF advantage - Page 14

Another tough year for emerging markets ?
ESG ETF maturity
Chapter 1 : Survey results

Another tough year for emerging markets ?

59 %

2023 will be the year of
Respondents are bullish on the outlook for developed markets in 2023 with 59 % of respondents claiming the next 12 months will be “ the year of ” this asset class versus just 29 % for emerging markets . Emerging markets suffered another tough year in 2022 amid a strong US dollar and woeful under performance of China which accounts for a large portion of the benchmark .
Developed Markets
Emerging Markets
Yes No
Not sure
It has been a challenging year for investors in China following the Chinese Communist Party ’ s decision to enforce a zero-COVID-19 policy , the impact of which has trickled into markets . In the current environment , investors are extremely cautious about the outlook for the world ’ s second largest economy .
Do you expect your allocation to China to grow in 2023 ?
Yes , significantly 1.69 % Yes , moderately
20.34 %
No Not sure yet
15.25 %
62.71 %

ESG ETF maturity

Following the recent ESG ETF boom in Europe , respondents are planning to take a slightly more moderate approach to their ESG allocations this year . Some 36 % plan to increase their allocations to ESG ETFs in 2023 while 34 % plan to maintain the same level of exposure . ESG ETFs have continued to see demand in Europe this year despite the performance headwinds many strategies have faced which highlights the stickiness of the asset class .
Will you allocate more to ESG ETFs next year ?
Yes , significantly more ( 8.47 %)
Maintain ( 33.90 %)
No ( 30.51 %)
Yes , moderately more ( 27.12 %)
Chapter 3: Non-transparent ETFs Active ETFs in Europe: Non-transparent structure not the solution? Daily disclosure requirements still in demand Author: Tom Eckett For years, European regulators have been under pressure from corners of the ETF industry to follow the US in greenlighting non-transparent ETFs, however, without the significant tax advantage US ETFs enjoy, questions remain over potential demand for the structure. It has been a standout year for ETFs across the globe highlighting the industry’s rapid development since the Global Financial Crisis in 2008. In Europe, exchange-traded products (ETPs) have been €62bn so far this year, according to data from Bloomberg Intelligence, and it has been a similar story in the US despite the challenging market environment. One part of the market that has helped boost this growth in recent years is active ETFs which have seen 15% of total US ETF flows this year, according to data from Bloomberg. Without the non-transparent model in Europe, active ETFs make up just 2% of the UCITS ETF market but this is growing as investors take advantage of not only the alpha on offer but also the growing number of outcome- orientated strategies focusing on areas such as thematics and income. Highlighting this, global assets in active ETFs hit $324bn in June with the majority of assets going to fully transparent strategies, according to J.P. Morgan Asset Management. The conventional wisdom is active ETFs either transparent or non-transparent are expected to Chapter 3: Non-transparent ETFs drive a new wave of asset managers to the market as the structure allows active managers to enjoy the benefit of no longer having to reveal their ‘secret sauce’ on a daily basis. Currently, ETFs in Europe are required to disclose their holdings daily, a process that has been in place since the launch of the first ETF this side of the pond in 2000, however, dialogue is currently ongoing with European regulators. The key reason for this regulatory requirement is so authorised participants can have a full view of an ETF’s underlying holdings and price the strategy accordingly. However, some parts of the industry argue this rule is outdated and has been a factor in holding back the growth of active ETFs, especially in the equity space where asset managers do not want to giveaway their best ideas to the rest of the market. The tide is starting to shift among regulators as well. The Securities and Exchange Commission (SEC) gave the greenlight to non-transparent ETFs in 2019 which has driven many active fund houses to convert their mutual funds into ETFs. 14 Chart 1: Five degrees of non-transparent ETFs Structure   Overview   Actual holdings disclosed daily, but not publicly• Independent authorised participant representative (APR) added to the ecosystem • APR uses confidential account to create and redeem shares   • Full portfolio holdings revealed quarterly Blue Tractor GroupActual holdings disclosed daily, without actual weights• Uses an algorithm to randomly generate weighting while reducing tracking error with the real portfolio   • Observers unaware if weighting changes are down to manager decision or algorithm   • APRs use substitute portfolio for pricing; actual weighting revealed quarterly   New York Stock Exchange (NYSE)Proxy portfolio used to represent actual holdings• Portfolio includes part real stocks and part that are not • Actual holdings disclosed on 15-day lag; proxy portfolio is selected by a factor analysis model • Proxy portfolio disclosed daily, real portfolio quarterly Fidelity InvestmentsDaily proxy combined with full disclosure monthly• Mathematically generated full proxy portfolio that discloses holdings with modified weightings • Proxy portfolio published daily • Real holdings disclosed each much with a 30-day lag T. Rowe PriceAt least 80% overlap between proxy and actual portfolios• Similar use of proxy portfolio to NYSE and Fidelity, with an 80% overlap between proxy and actual portfolio • Actual portfolio is disclosed quarterly with a 15-day lag Precidian Investments This new innovation was first looked at by the Central Bank of Ireland (CBI) as part of its discussion paper on ETFs in 2017, however, the regulator made no changes to the requirements which was viewed by the market as a ‘wait and see’ move. Earlier this year, however, the International Organisation of Securities Commissions (IOSCO) released its ETF good practices proposals to the industry which appeared to suggest the global watchdog is not wedded to daily disclosure requirements. In particular, IOSCO encouraged regulators to ensure market participants have the right information to facilitate effective arbitrage but did not suggest the US’s move to greenlight non- transparent ETFs was an issue from a structure perspective. Despite positive signs from regulators, it is unclear whether the non-transparent ETF structure would be significantly beneficial for investors in Europe. Crucially, European ETF investors do not enjoy the same tax benefits over mutual funds compared to the US where “in kind” ETF creations do not incur capital gains tax, a crucial reason why asset managers have been converting mutual funds into ETFs stateside. Furthermore, one of the most attractive aspects of ETFs is the transparency of the underlying holdings. While mutual funds only disclose their top 10 holdings at the end of each month, it has been a unique selling point for the ETF wrapper as daily disclosure provides an investor with clear insight into why their portfolio is behaving the way it is. As Andrew Limbers, investment manager at Omba Advisory & Investments, told ETF Stream: “We still have the transparency requirements in place which is one of the most attractive things about ETFs. “As ETFs have to disclose their holdings daily, we know exactly what we hold so on the fixed income side, for example, we can easily understand the yield, duration and credit risk of each strategy.” Overall, it is likely the CBI will follow the lead of the US and greenlight non-transparent ETFs, especially given IOSCO’s ETF good practices, however, do not expect this to be a solution that is guaranteed to resonate with investors this side of the pond. Tom Eckett is editor of ETF Stream 15