BLUECHIPINVESTMENT |
BLUECHIPINVESTMENT | AMETFsWhat you need to know aboutAMETF transparencyActively managed exchange-traded funds are gaining traction as South African investors seek moredynamic and potentially higher-return opportunities.Unlike traditional passive exchange-traded funds (ETFs)that track an index, actively managed exchangetradedfunds (AMETFs) involve professional portfoliomanagement. This entails a team of experts activelyresearching securities, analysing market trends and leveragingproprietary models.The growing popularity of AMETFs internationally hassparked a lively discussion about portfolio transparency.Unlike traditional index-tracking ETFs, which follow clear,predefined benchmarks, AMETFs are guided by the expertiseof fund managers, who aim to outperform the market.The question then is: how transparent should AMETFs beabout their portfolio holdings?Transparency optionsThere are essentially three different transparency options,depending on where they are issued and the preference ofthe fund manager. These are:1. Transparent. Disclose all portfolio holdings and theirweights on the manager’s website daily.2. Semi-transparent. Disclose holdings monthly orquarterly and may also release “proxy portfolios” thatmay not include all holdings.3. Non-transparent. Only required to disclose theirholdings quarterly or monthly.Regional approachesUnited States. Regulatory requirements dictate that mostETFs, including actively managed ones, disclose theirholdings daily, giving investors real-time insight into theassets they own. However, some actively managed funds viewdaily transparency as a double-edged sword: while it fostersinvestor trust, it also exposes a fund manager’s strategy,making it more vulnerable to being replicated by competitorsor front-run by traders.To address this, the US Securities and Exchange Commission(SEC) approved a new class of “semi-transparent” or “nontransparent”ETFs in 2019. These funds are required to disclosetheir holdings quarterly rather than daily, balancing investordemand for insight with the need to protect proprietarystrategies. This model has proven popular and has expandedthe AMETF market, attracting investors who value the securityof knowing what they hold without compromising fundmanagers’ competitive edge.Europe. The transparency requirements differ from countryto country. Some regulators, like the French Autorité desMarchés Financiers, have recently relaxed the transparencyrules, and semi-transparent ETFs are now required to publishholdings “at least once a month”. Issuers may share the dailycomposition of their portfolios with contracted marketmakers but must simultaneously distribute this information38 www.bluechipdigital.co.za
INVESTMENT | AMETFsBLUECHIPthrough the same channel to all relevant parties, reducingthe risk of front-running. In December 2024, Luxembourg’sCommission de Surveillance du Secteur Financier publishedan FAQ providing for the possibility to defer the disclosure ofan AMETF portfolio composition. This information is requiredto be published at least monthly. The Central Bank of Irelandis also looking at relaxing its transparency rules for AMETFs.South Africa. The AMETF market is still in its infancy, withthe Johannesburg Stock Exchange (JSE) only allowing listingsfrom 2022. As in Europe, South African fund managers arecautious about sharing too much information, given concernsabout strategy replication and market impact. The JSE hasallowed fund managers the choice of either transparent ornon-transparent AMETFs, where holdings are only requiredto be disclosed on a quarterly basis, but intra-day Net AssetValues (iNAVs) must be published at least three times a day.The level of transparencythat investors require oftendepends on their priorities.The benefits of semi-transparent or non-transparentAMETFs• New market adaptation. Quarterly disclosures provideenough information for investors while allowing fundmanagers to innovate.• Reduced managerial pressure. Less frequent transparencygives managers room to focus on their strategies.• Protection from front-running and replication. SemitransparentETFs help protect investors from other tradersjumping ahead of the fund’s trades or copying its strategy.• Access to equity capabilities. Many fund managers arehesitant to adopt AMETFs due to transparency concernsand may be more willing to offer equity capabilitiesthrough semi-transparent options.regulatory requirements, making them more accessible toa broad range of investors.• Simplified monitoring. Investors can more easily tracktheir portfolio’s performance and risk exposure byreviewing the disclosed holdings, ensuring alignment withtheir investment strategy.• Market stability. Transparency contributes to overallmarket stability by providing consistent and reliableinformation to participants.Balancing transparency and investor needsWhile transparency builds trust, allowing investors tounderstand risks and track their investments, especiallyduring market volatility, excessive transparency can exposefund managers to competitive risks. AMETFs need continuousinnovation to outperform benchmarks, and daily transparencymay lead to strategy replication or short-term decisions thathinder long-term growth.The level of transparency that investors require oftendepends on their priorities. Retail investors may not alwaysneed real-time insights into an ETF’s holdings, especially wheniNAVs can help them assess whether the ETF is trading closeto its fair value.Investors need to assess which level of transparencyaligns with their investment goals and risk tolerance. Thoseseeking real-time accountability may prefer transparentAMETFs, while those focused on long-term returns mightfind semi-transparent or non-transparent ETFs more suitable.The landscape of AMETFs reflects the broader trend towardcustomisation and choice in investing. By understanding thetrade-offs of each structure, investors can make informeddecisions that best align with their financial objectives. The benefits of transparent AMETFs• Efficient pricing. Daily transparency has been tied toan efficient arbitrage mechanism, resulting in narrowerpremiums and discounts, tighter spreads and betterliquidity as market makers precisely know the compositionof the basket of stocks within the ETF.• Investor confidence. Full transparency allows investorsto see exactly where their money is allocated, enhancingtrust and satisfaction. This is particularly appealing duringperiods of market volatility.• Regulatory compliance. Transparent ETFs meet stringentNiki Giles, Head of Strategy, Prescient Fund Services
