Understanding the risks of active semi-transparent ETFs


After gaining regulatory approval in 2019, active semi-transparent exchange-traded funds (ST ETFs) have generated significant investor interest in an active product with some of the same benefits that index ETFs offer.

While the emergence of active ST ETFs has given investors another tool to potentially help improve the risk-adjusted returns of their portfolios, these structures have a different set of risks than actively managed mutual funds and index ETFs. Investors need to know and understand the key differences among these products before making an investment decision.

Broadening access to active management through ETFs

Index ETFs, which comprise the vast majority of ETFs in the market today, offer investors a low-cost and efficient way to gain broad market exposure through a vehicle that trades like a stock. Few ETFs are actively managed, largely due to strict transparency rules that require them to publicly disclose holdings on a daily basis.

Yet that is changing, following the 2019 SEC approval of the new semi-transparent (or nontransparent) ETF structure that allows these ETFs to disclose their holdings with a time lag, similar to that of a mutual fund. This structure mitigates many active managers’ concerns about replication of their investment strategies due to daily disclosure, and subsequently paves the way for a greater number of active managers to offer their strategies in an ETF structure.

Active ST ETFs comparison at a glance

  Actively managed mutual funds Index ETFs Active ST ETFs

Delay in holdings release




Potential for tax efficiency





Moderate to high



Price availability

End of trading day



Ability to close capacity constrained strategies




Investment coverage

Broad exposure to equity and fixed income

Broad exposure to equity and fixed income

Currently limited to U.S. stocks and American Depositary Receipts of foreign companies and Global Depositary Receipts

Evaluating active ST ETFs

Active ST ETFs received broad regulatory approval in 2019 (with the first one launching in 2020), allowing more managers to offer these products to retail investors without disclosing their intellectual property. While some active ETFs have been around for more than a decade, active ST ETFs are new and have track records of less than three years.

That’s why investors need to look closely at the product offered. The investment strategies behind many active ST ETFs are based on existing mutual funds, including those with longstanding track records or those managed by the same investment team that manages similar strategies with long-term performance. While it is essential to monitor the actual track record of the ETF, similar mutual funds may serve as at least a barometer for how the ETF may have fared during historical market environments. Some of the other information that investors should consider for an active ST ETF is the ETF’s excess returns, tracking error, trading volume, size, information ratio and bid–ask spreads. In other words, you can assess active ST ETFs on many of the same characteristics as a traditional actively managed mutual fund, while also being aware that many active ST ETFs have relatively short track records.

Trading and liquidity challenges of active ST ETFs

When looking at ETFs, assessing the liquidity of the underlying assets may offer more insight than the average daily trading volume. Mutual funds do not provide daily disclosure of portfolio holdings and can only be traded at the end of the day. Fully transparent ETFs provide daily disclosure of portfolio holdings and are thus able to be traded throughout the day at the lowest bid/ask spreads (among the three structures discussed). Finally, active ST ETFs, while not providing daily disclosure of portfolio holdings, do provide daily disclosure of a proxy portfolio, are able to be traded throughout the day and will have bid/ask spreads higher than comparable fully transparent ETFs.

Actively managed mutual fund portfolio managers can close their strategies to new investments to preserve the integrity of their investment strategy for shareholders. Active ST ETFs, however, do not have this capability. As such, active ST ETFs tend to invest primarily in mid- and large-cap equities where liquidity tends to be sufficient. This could limit potential opportunities for active ST ETFs. Additionally, a portfolio manager who can appropriately maintain exposure to liquid and tradeable stocks—regardless of market cap—may enable the ETF issuer to handle large inflows or outflows without significant impact on the ETF’s bid/ask spread.

Bid/ask spreads are potentially wider

Active ST ETFs lag in public holdings disclosure to protect the investment manager's proprietary investment ideas, and may exhibit wider bid/ask spreads; these ETFs can be susceptible to tracking error relative to their traditional counterparts that disclose their holdings daily. During periods of market stress or volatility, shares of active ST ETFs may have higher transaction costs than fully transparent ETFs.

The active ST ETF investment universe is currently limited

A critical note about active ST ETFs is the universe of securities in which they can invest. Currently, these funds are restricted to holding securities that trade contemporaneously as the funds themselves—which primarily includes U.S. stocks and American Depository Receipts (ADRs). It is anticipated that the universe of allowable investments will expand over time to include areas such as ordinary shares of international equities. Still, that area is currently off limits within this structure.



Combining features of actively managed mutual funds with the structural benefits of ETFs appears to have generated significant industry interest in active ST ETFs, as flows have indicated over the last year. This newer breed of ETF can help investors further diversify their portfolios and meet their long-term investment goals. Active ST ETFs may feel familiar, but they come with a different set of risks than traditional ETFs and mutual funds.

That’s why we believe it is imperative to select an experienced investment manager and ETF provider. Active strategies strive to deliver potential excess returns over and above a benchmark return, which means the range of outcomes and performance deviations will be much greater than for traditional index ETFs. Investors should consider working with experienced investment managers with a straightforward and robust process for selecting stocks, constructing portfolios and managing risk. Since active ST ETFs will tend to behave more like the underlying asset class in which they’re invested, an experienced capital markets team is essential to managing risks and harnessing the many advantages of the ETF structure.


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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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