2022 will be a transitional year for active exchange-traded funds (ETFs). New research from Cerulli, U.S. Exchange-Traded Fund Markets 2021, finds ETF industry participants are adamant that the active ETF opportunity—more so than the strategic beta or passive one—is currently the most significant. As managers look to bring active product to market, they should continue monitoring the various approaches to launch and understand the tradeoffs associated with each.

The research asserts that the transparent active opportunity is most attractive relative to semi-transparent, strategic beta, and passive offerings. 70% of polled ETF issuers are either currently developing or planning to develop transparent active ETFs. With $266 billion in assets encompassing multiple asset classes and a consistent growth trajectory, transparent active ETFs are already a well-built category and development has more recently been spurred by the ETF rule. However, Cerulli notes that out of $104 billion in active equity exposures, only a sliver is in true active equity products given that a significant portion is allocated to thematic and strategic-beta-like offerings.

Managers can also be successful with semi-transparent offerings. 50% of polled ETF issuers either are currently developing or planning to develop semi-transparent active ETFs, with issuers coalescing around the Fidelity structure—42% report they are very likely or somewhat likely to use the structure. Because holdings overlap and the number of holdings between the same product in two structures can vary significantly, this can lead to performance dispersion. This also complicates the cost-benefit analysis, requiring additional diligence from advisors and home offices.

Mutual fund to ETF conversions may serve as another avenue for managers in specific instances, namely if the product offering is a strategic fit for investors due to low cost or the type of exposure. “The process, however, is relatively complex and poses myriad challenges,” according to Daniil Shapiro, associate director. “Managers considering launching active ETFs should also keep an eye on the dual-share-class structure used by Vanguard, which comes off patent in 2023,” he states. Previous Cerulli research finds that 38% of issuers are at least considering offering products via this structure. “Considering managers’ interest in offering products in a wrapper-agnostic manner, there is certainly some simplicity to be gained from having the same exposure available for sale via two structures—therein avoiding some of the previously referenced concerns about different exposures in what may be expected to be the same semi-transparent ETF,” adds Shapiro.

As issuers and legacy mutual fund managers seek to identify their market entry approach—whether via launching transparent or semi-transparent product, a conversion, or dual-share-class structure—many are still taking a wait-and-see approach to see which firms win out while others are placing bets. “Ultimately, while the transparent active opportunity may be the most significant asset-gathering opportunity, managers can also be successful via semi-transparent ETFs with the right distribution approach,” says Shapiro. “Conversions should be considered in unique circumstances, while developments regarding the dual-share-class structure should be monitored.”