The ball is in asset management’s court.

Now that the Securities and Exchange Commission has approved non-transparent exchange-traded funds, fund sponsors will determine their popularity, according to a recent report by Cerulli Associates. 

Most active managers haven’t considered the ETF wrapper because it required them to divulge their holdings. At the end of 2018, there were 1,660 index-based ETFs with $3.2 trillion in assets, compared to fewer than 300 actively-managed ETFs with less than $100 billion, according to an earlier Cerulli report.

All ETFs now hold a total of almost $5 trillion.

But since the SEC voted to amend ETF rules in November, more active managers might consider offering non-transparent ones. 

Nearly half of ETF issuers said they are developing (20%) or planning to develop (27%) non-transparent, active ETF products, a “momentous shift” in the market given that only about 2% of ETF assets are actively managed, according to Cerulli. Some of the largest asset managers are either signing non-transparent structure licensing agreements or launching their own, according to the researcher.

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Still, it’s exceptionally hard to predict how much money will flow into non-transparent ETFs – even asset managers don’t appear to have a firm sense of this. Cerulli found that 80% of ETF issuers estimate that nontransparent ETFs will gather between $1 billion and $100 billion by 2025. In other words, the roughly $100 billion actively-managed ETF market might barely grow at all or double in size over the next five years.

Product choices and pricing will be the most significant challenges for asset managers to overcome, according to Cerulli. 

“Assuming that the non-transparent structures and associated infrastructure are found to be capable of supporting their strategies, asset managers will have to decide whether their newly launched products should be clones, differentiated versions, or entirely different products when compared to their existing offerings,” Daniil Shapiro, associate director of Product Development at Cerulli Associates, wrote in the report.

“Asset managers will find it difficult to offer their best products at an attractive price—despite low costs being a key success tenet for ETFs—risking creating a self-fulfilling prophecy where launched products are slow to gain traction.”

More actively-managed ETFs coming to market doesn’t guarantee financial advisors and investors will take to them.

In a letter the day following the ETF rule changes, SEC commissioners made it clear they were comfortable with existing guardrails for nontransparent ETFs. But they also highlighted risks.

“Nontransparent ETFs come with real risk that, in moments of limited liquidity, ordinary investors will face wider spreads and hence get prices that do not accurately reflect the value of their shares. By targeting largely liquid assets and adopting guardrails to address these issues, these applicants have helped mitigate that concern. But we would be skeptical of nontransparent funds focused on different asset classes that lack those characteristics.”