An introduction to active semi-transparent ETFs


Active semi-transparent (or nontransparent) exchange-traded funds (ST ETFs) are a small but fast-growing segment of the U.S. retail market. Like many actively managed funds, active ST ETFs seek to outperform comparable strategies by applying professional, active decisions to the investment process. But they also deliver many of the benefits that are unique to ETFs, including potentially lower fees than comparable mutual funds, intraday trading and potential for tax efficiency.

Regulatory approval in late 2019 paved the way for this vehicle. While the inner workings of these investment products may seem complex, they rely on the infrastructure and many of the same processes used by index ETFs.

Mutual funds helped pave the way for ETFs

The first mutual funds were developed about a century ago on the premise that investors could benefit from professional management by pooling money in a diversified portfolio of stocks.

Not a lot has changed for the actively managed mutual fund since then. A professional manager or group of managers have conviction around a proprietary investment methodology they believe will outperform the market. They keep the portfolio details away from prying eyes.

Many decades later, along came the ETF. First developed and launched in the early 1990s, ETFs offered investors a convenient way to gain broad market exposure through a pooled vehicle, although the key differences are that ETFs trade like a stock during equity market trading hours, unlike mutual funds, which are only priced once a day, and often have lower fees than comparable mutual funds. Given stringent transparency rules, however, most ETFs have tracked an index or have been passively managed, as professional managers could not offer the vehicle without revealing proprietary information about their investment process.

New rules are transforming ETFs

An important regulatory leap in 2019 is transforming how investors can access actively managed portfolios. The SEC approved active ST ETFs—a new category of ETFs not required to disclose portfolio holdings daily. However, many of these ETFs are required to disclose a "proxy portfolio" every day. Up to this point, with few exceptions, transparent ETFs have published their full portfolio holdings daily.

Active ST ETFs allow portfolio managers to deliver potential alpha-generating investment strategies to investors without exposing their methodology or the portfolio’s buying or selling decisions to the market for up to a full calendar quarter. This limited disclosure feature helps protect the portfolio’s investment returns by making it difficult for competitors to replicate or trade against their strategy.

Active ETFs: Gaining momentum in the market

The growth rate of active strategies in ETFs has been robust.

Growth of Active ETFs over time

Source: Morningstar Direct as of 9/30/2022.

How do active ST ETFs work?

Active ST ETFs share many characteristics with transparent ETFs (as shown in the table below). The critical difference is the less frequent disclosure of portfolio holdings. Instead of publishing this information daily, active ST ETFs generally disclose holdings quarterly, much like a traditional mutual fund. For certain active ST ETF structures, various portfolio characteristics are disclosed each day alongside a proxy portfolio. The proxy portfolio is a specified group of securities that closely tracks the daily performance of the actual portfolio holdings and is used by authorized participants for creation and redemption transactions. The portfolio characteristics disclosed each day may include the percentage overlap between the proxy portfolio and actual portfolio holdings, the daily tracking error between the proxy portfolio and actual portfolio holdings, and a real-time indicative per share net asset value (NAV). This information helps support efficient trading of ETF shares in the secondary market by all types of market participants, not just the market makers and authorized participants. Like transparent ETFs, efficient trading in the secondary market depends on market makers’ ability to keep the market price of an ETF’s shares closely aligned with its NAV by arbitraging away any significant deviations through the creation and redemption process.

  Comparing transparent and active ST ETFs
ETFs Transparent ETFs Active ST ETFs

Commingled portfolio with generally lower fees than -comparable mutual funds

Most seek to track an index1

Daily creation basket constituents may not be actual portfolio holdings

Actual portfolio holdings disclosure less frequent

Potential tax efficiency

Daily portfolio transparency

Asset class coverage generally limited to U.S. stocks

Six different structures approved by the SEC2

1. Source: Morningstar Direct as of 9/30/2022.

2. As of September 30, 2022.


Although active ST ETFs have a relatively short track record in the U.S. market, asset growth has been strong. Trading volumes have also been healthy, and secondary market bid—ask spreads have generally been comparable with the underlying securities held in these portfolios. These newer ETFs may help investors further diversify their portfolios and meet their long-term investment goals.


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What makes the Schwab Ariel ESG ETF different from traditional ETFs?

Traditional ETFs tell the public what assets they hold each day. This fund will not. This may create additional risks for your investment. For example:

  • You may have to pay more money to trade the fund’s shares. This fund will provide less information to traders, who tend to charge more for trades when they have less information.
  • The price you pay to buy fund shares on an exchange may not match the value of the fund’s portfolio. The same is true when you sell shares. These price differences may be greater for this fund compared to other ETFs because it provides less information to traders.
  • These additional risks may be even greater in bad or uncertain market conditions.
  • The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.

The differences between this fund and other ETFs may also have advantages. By keeping certain information about the fund secret, this fund may face less risk that other traders can predict or copy its investment strategy. This may improve the fund’s performance. If other traders are able to copy or predict the fund’s investment strategy, however, this may hurt the fund’s performance.

For additional information regarding the unique attributes and risks of the fund, see Proxy Portfolio Risk, Premium/Discount Risk, Trading Halt Risk, Authorized Participant Concentration Risk, Tracking Error Risk and Shares of the Fund May Trade at Prices Other Than NAV in the Principal Risks and Proxy Portfolio and Proxy Overlap sections of the prospectus and/or the Statement of Additional Information.

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