Active Semi-Transparent ETFs: What's Under the Hood?
Key takeaways
- Active semi-transparent ETFs are designed to give investors the benefits of ETFs while allowing fund managers to avoid disclosing what the fund owns each day.
- Because these funds share less information about their holdings than traditional ETFs, different methods are used to help keep prices aligned with the funds' values.
- These different structures can come with tradeoffs, including the potential for wider bid-ask spreads and less tax efficiency than investors may expect from a traditional ETF.
- Before investing, it helps to understand how these funds work, and how they compare to other fund types.
When it comes to cars, everyone wants a safe and reliable vehicle. If you're buying a car, it's a good idea to take a look under the hood. What you see there may tell you a lot about the vehicle's performance, cost, and reliability for years to come. When it comes to financial products, it's also true that looking under the hood before you make an investment can be helpful. For example, active semi-transparent exchange-traded funds (ETFs) differ in important ways from traditional ETFs. And those differences make knowing what's "under the hood" more important than ever.
Most ETFs on the road today are based on the '40 Act fund chassis (referring to the Investment Company Act of 1940). This means these ETFs are basically structured the same way traditional mutual funds are, but the U.S. Securities and Exchange Commission (SEC) allows them to do things a little differently. For example, traditional '40 Act mutual funds buy and sell shares at the end of each trading day, with investors of all sizes, at the fund's net asset value (NAV). ETFs, on the other hand, transact only with large, authorized participants (APs) in big bundles of shares (typically 50,000). Another difference between ETFs and mutual funds is the frequency of portfolio disclosure. While mutual funds typically disclose their holdings either monthly or quarterly with a lag (up to 60 days), most ETFs disclose complete holdings information every day the markets are open.
Historically, most ETFs operated with similar exemptions from the Investment Company Act of 1940, but newer types of ETF structures began receiving approval from the SEC in 2019. These ETF models are frequently referred to as "active semi-transparent," and the first ETFs based on these models were launched in 2020.
Although the details vary, the purpose behind these new models was to make ETFs friendlier to active fund managers by removing the requirement that holdings be disclosed daily. Active fund managers initially avoided the ETF structure, amid concern that providing daily full disclosure would allow traders to front-run their trades and for competitors to steal their "secret sauce."
However, daily disclosure has been a very important component of ETF mechanics. Knowing exactly what's inside an ETF allows market makers and APs to efficiently value the portfolio, and these entities tend to conduct trades that keep the ETF's price generally in line with its underlying value. With active semi-transparent ETFs, daily disclosure of holdings isn't the standard. Instead, they are required to report their holdings quarterly, with up to a 60-day delay at the end of each fiscal quarter, although some funds may report holdings more frequently, such as at the end of each month.
As a result, semi-transparent ETFs rely on other features to keep the fund trading smoothly. One type of semi-transparent model uses creation/redemption baskets that are slightly different from a fund's actual holdings. These proxy portfolios may include decoy securities and/or alternative weighting schemes. The ETF's sponsor may provide information on the fund's website about how closely the performance of the fund matches the proxy portfolio (also referred to as the "tracking basket" by some issuers).
Liquidity, taxes, and other considerations
These structural differences come with tradeoffs. In some cases, the bid-ask spreads of active semi-transparent ETFs are higher than those of traditional ETFs. This may be due to the fact that APs and market makers must employ different tools to efficiently value active semi-transparent ETFs, and some of the new active semi-transparent models appear to depend on a level of trust developing between the entities involved (APs, fund sponsors, etc.).
Furthermore, tax efficiency could be a concern for semi-transparent ETFs that rely on proxy portfolios, since ETF managers will have to buy and sell securities to better align the securities they receive through creation baskets with the securities they actually want to own. In other words, more selling inside the fund could potentially reduce the tax efficiency of active semi-transparent ETFs compared to traditional ETFs. However, in 2025, just three semi-transparent ETFs made capital gains distributions, according to Morningstar. Moreover, Morningstar's Tax Cost Ratio, which measures how much of a fund's annualized return is reduced by the taxes investors pay on distributions, shows little difference between the median Tax Cost Ratios of active semi-transparent ETFs and traditional, actively managed ETFs in the same Morningstar Categories.
Lastly, the range of investment strategies offered by active semi-transparent ETFs is somewhat limited since the securities eligible for inclusion in these funds' portfolios must be U.S. exchange-listed and trade during U.S. market hours.
Bottom line
While active semi-transparent ETFs offer investors additional choices, it's important to remember that these ETFs have structural differences from traditional ETFs, and investors should proceed with caution.
Comparing the structure of different fund types
- Mutual Funds
- Traditional ETFs
- Active Semi-Transparent ETFs
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What is it?Mutual Funds
An investment vehicle typically based on the Investment Company Act of 1940 that allows investors to pool assets and collectively purchase stocks, bonds, or other securities.
Mutual funds are either actively managed (investment decisions are based on the analysis of a single individual or investment team) or passively managed (the fund attempts to replicate a published index).
Traditional ETFsAlso based on the Investment Company Act of 1940 (typically), but with significant exceptions to certain rules. For example, ETFs have received permission from the SEC to transact only with large, authorized participants (or APs) in big bundles of shares (typically 50,000).
While most traditional ETFs are passively managed, there are actively managed ETFs as well.
Active Semi-Transparent ETFsNewer fund structures with additional differences vs. the Investment Company Act of 1940.
Although the details and mechanics of these structures vary, the purpose behind all of them is to make ETFs more attractive to active managers by not revealing the underlying holdings on a daily basis to market participants who may abuse such information.
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Creation/redemption of sharesMutual FundsInvestors buy or sell shares directly from the fund company (or through an intermediary, such as Schwab). Shares are created when the fund company receives investors' cash and issues shares to the investor at a price called the net asset value (or NAV). The NAV is the end-of-day value of all the fund's assets minus its liabilities. All investors buying or selling on the same day receive the same NAV price.Traditional ETFs
Only APs are able to transact directly with the fund company. Investors buy and sell shares from APs (and other market participants) on national stock exchanges throughout the trading day at prices which may differ from NAV.
Furthermore, most ETFs are created/redeemed "in-kind." To create shares, APs must deliver the securities in the creation basket to the fund's sponsor in exchange for ETF shares. To redeem shares, APs deliver ETF shares to the fund sponsor and receive the fund's underlying holdings in return.
Active Semi-Transparent ETFsCreation/redemption processes vary based on the exact terms of the structure; numerous structures have been proposed to the SEC and several have received SEC approval.
In most of the structures, the AP creates/redeems shares via a proxy portfolio (i.e., it delivers or receives securities that are not exactly the same as those actually held by the fund).
However, in one structure, the creation basket contains the same holdings as the fund, but there is an additional intermediary between the fund sponsor and the AP.
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Disclosure of full portfolio with actual holdingsMutual FundsEither monthly or quarterly with a lag of up to 60 daysTraditional ETFsTypically, dailyActive Semi-Transparent ETFsEither monthly or quarterly with a lag of up to 60 days
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Intraday calculation of portfolio valueMutual FundsNot availableTraditional ETFsNo longer required by the SEC, but (when provided) typically calculated every 15 seconds; based on actual ETF holdings.Active Semi-Transparent ETFsVarious structures offer different calculation frequencies and are based on either the actual portfolio or a similar, proxy portfolio.
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TradingMutual FundsShares are bought and sold at end of day net asset value (NAV) directly with a fund sponsor.Traditional ETFsShares are bought and sold on exchanges at market prices throughout the trading day.Active Semi-Transparent ETFsShares are bought and sold on exchanges at market prices throughout the trading day. Because market makers and APs may be less able to accurately value the underlying holdings, shares may trade with wider bid-ask spreads and bigger premiums/discounts compared to traditional ETFs.
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Portfolio ManagementMutual Funds
Portfolio managers may create capital gains when they sell shares inside the portfolio. This can lead to lower tax efficiency.
Alternatively, holding cash to facilitate flows may reduce performance compared to a fully invested portfolio.
Traditional ETFsMay use the creation/redemption process to remove lower-cost basis shares from the portfolio, which could increase tax efficiency.
Cash drag (the negative impact that excess cash can have on a company's or a fund's financial performance) is marginal due to receiving and distributing shares primarily in-kind.
Active Semi-Transparent ETFsMay use the creation/redemption process to remove lower-cost basis shares from the portfolio, which could increase tax efficiency.
However, for structures which rely on proxy portfolios, managers will have to buy and sell securities to better align the securities they receive through creation/redemption baskets with the securities they actually want to own. This could reduce the tax efficiency of active semi-transparent ETFs compared to traditional ETFs and possibly create a drag on performance.
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Expense ratiosMutual FundsNet expense ratios often tend to be higher than ETFs, especially for actively managed mutual funds, which require research teams and tools (data packages, technology tools, etc.).Traditional ETFsNet expense ratios often tend to be lower, especially for funds tracking standard indexes in easy-to-access asset classes (e.g., U.S. large cap equities).Active Semi-Transparent ETFsNet expense ratios may be higher, since these types of ETFs also require research teams and tools (data packages, technology tools, etc.).