Exchange Traded Funds (ETFs) have traditionally been associated with passive investing — but that’s quickly changing. At the Financial Markets Quality panel on innovation in ETFs, Natasha Vij Greiner, Director, U.S. Securities and Exchange Commission Division of Investment Management, said that the actively managed part of the market has grown significantly even in just the last year. The SEC’s Rule 6c-11 adopted in 2019 standardized ETF operations, and “changed the tone and tenor” of how the exemptive process informed rulemaking, she added.
Gerard O’Reilly, Co-Chief Executive Officer and Co-Chief Investment Officer, Dimensional Fund Advisors LP, who prefers “index versus non-index” to “passive versus active,” says that indexing in itself is inherently inflexible in how it adapts to changing markets. Before Rule 6c-11, there was more of an emphasis on fees, spreads and liquidity, but now there’s more of a focus on the investment proposition. It should be “investment proposition first, wrapper second.”
And what about old school fund managers’ concerns with transparency?
Samara Epstein Cohen, Chief Investment Officer, BlackRock ETF and Index Investments said that, for the most part, portfolio managers deploying alpha seeking ETFs (those aimed at outperforming benchmarks) have been pretty comfortable with daily transparency. Dimensional Fund Advisors’ O’Reilly, chimed in that when you have broad diversification, what you trade on a given day is not necessarily reflective of an entire portfolio.
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