Actively managed ETFs that aim to outperform a given benchmark need transparent and efficient servicing processes to be competitive, according to State Street.
The firm's latest Vision Focus report says active ETFs have high growth potential and have "piqued the interest" of many market participants since emerging in 2008.
State Street says although active ETFs have been slow to burgeon, they are already changing the way ETFs are serviced. This is largely because an active fund does not necessarily reflect a benchmark, as the ETF is subject to a manager's selection.
However, State Street questions the transparency of active ETFs, as holdings can change up until the close of the stock market on a given day.
Transparency is one of the fundamental attractions of ETFs, allowing investors to see what the portfolio comprises on a daily basis. This is also important for enabling authorised participants to know what assets they must gather to form the basket of securities that is exchanged for an ETF creation unit.
The firm says data is an issue to consider with active ETFs. As holdings in active ETFs can change during the day and as these funds have greater trading frequency, more needs to be done to keep data renewed and accurate. State Street suggests one solution is to process data even after offices close, to ensure current iNAV (net asset value) is provided.
The low-cost of ETFs is another attraction, which is arguably at odds with active funds, due to the extra expenses incurred by portfolio management, greater trading and research of securities.
State Street also asks how closely a "truly active" ETF should track its respective index and how active trading affects basket composition, data processing and efforts to maintain transparency.
The firm adds actively and passively managed ETFs should be able to co-exist because they fill different needs in investors' portfolios.
