ASIC Lifts Ban on New Active ETFs. What Does This Mean for Australian Investors?

Last week, the Australian Securities & Investments Commission (ASIC) lifted a nearly 6-month pause on the introduction of new ‘active’ ETFs. 

With this announcement, it has been forecast active ETFs will boom in Australia in the coming months.

For active managers, this could mean more opportunities and exposure in managing new ETFs, and for investors, more ETF products on the market.

For nearly 30 years, ETFs have been typically a ‘passive’ investment, tracking an index or sector. Their appeal is largely driven by price, portfolio diversification, liquidity and transparency.

The issue of ‘transparency’, however, comes into question with active ETFs. Actively managed ETFs are newer on the scene, and allow the executor or manager of a fund to select stocks and make bids/offers as they see fit. These ETFs do not necessarily disclose their portfolio composition and position daily.

This and other non-transparent ETF practices raised market integrity concerns, and in July of this year ASIC put an official pause on the introduction of any of these new ETFs.

For many active managers, revealing their personal investment strategy was not ideal. Non-transparent ETFs seemed a happy medium in the sense that they remain reasonably priced and liquid enough for intraday trading, but offered managers the ability to keep their particular strategy private.

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What followed has been a nearly half-year review, with the ultimate result being ASIC lifting the ban.  They have announced they were satisfied for Active ETF Managers to make said trades without disclosing portfolio information daily, and to act with their investors best interests in mind.

There are, of course, stipulations to this. ASIC have stated they want more transparent pricing on ETFs. In addition, ASIC requires “There are adequate arrangements for identifying and responding to instances of substantial information asymmetry in the market, which may include cessation of market making activities or requesting a trading halt.” Essentially this, and other regulations, are in place to ensure:

  • Fund managers are not ‘ripping off’ investors by intentionally selling units at a higher price point than would be their assessed value
  • ASIC have the power to pause the sale and trading of any of these particular assets if they suspect market integrity risks

Now that new ETFs are once again allowed to be created and traded, it is expected that there will be an increase in actively managed ETFs available. So, what are the key things to consider if you’re looking to invest in an active ETF?

Pros:

  • Similiar to a ‘passive’ ETF, active ETFs may present the opportunity for greater portfolio diversification, and can be bought and sold on an exchange
  • Active ETFs offer the opportunity to own portions of stocks in larger companies at a lower cost
  • Active ETFs are actively managed, meaning a fund manager is monitoring the stock market and responding accordingly in purchasing/selling decisions within the ETF

Cons:

  • The ASX trading price of particular units can differ in value from the Net Asset Value (NAV) of units within the ETF 
  • The portfolio construction of the ETF may not be readily available to investors on a daily basis
  • The ETFs performance is dictated by the success of the fund manager, and if they make a poor decision the fund may suffer

Active ETFs can be invested in through a broker, or by using an Online Share Trading platform. Be sure to do your due diligence prior to making any investment decisions.

Compare Online Share Trading Platforms.

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