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 %)
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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.
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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
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