Global Investment Strategy | Global Financial Services

For decades, ETFs have built their reputation on one defining trait: daily transparency. Investors knew what they held, when they held it, and at what cost. That clarity became the bedrock for trillions in global flows.

Now, a quiet but consequential shift is underway.

Regulators in Europe have greenlit a new type of ETF - semi-transparent or non-transparent active ETFs - which aren’t required to publish their full holdings daily. These funds are permitted to disclose positions quarterly, more akin to traditional mutual funds.

On paper, it is a straightforward structural adjustment. In practice, it could reshape how active managers engage with the ETF wrapper. But will it?

The logic behind the shift: Protecting alpha in a hyper-connected market

The premise behind semi-transparent ETFs is straightforward: active managers should be able to protect their intellectual property.

If you run a high-conviction strategy that leans heavily away from the benchmark, daily disclosure risks exposing your edge. In less liquid markets or with concentrated positions, your trades could be anticipated, or front-run, by hedge funds or algorithmic traders.

By reducing disclosure frequency, managers can operate more freely. In theory, this should encourage more genuine active management, rather than the diluted “benchmark-hugging” that has become common in the ETF space.

It also opens the door to asset classes and strategies previously off-limits to ETFs, such as small and mid-cap equity, thematic investing, and active credit.

So far, so lukewarm: The U.S. has been here before

Europe’s recent regulatory change is new, but the concept is not. The United States approved semi-transparent ETFs back in 2019.

And the results? Underwhelming.

Despite a strong pipeline of products and initial media buzz, semi-transparent ETFs now account for just 1.8% of active ETF assets in the U.S. market. That’s a rounding error in a $7 trillion industry.

Why the lack of traction?

Several reasons stand out:

· Investor inertia: The typical ETF buyer has been conditioned to expect low cost and full transparency.

· Platform friction: Advisers and platforms often require daily disclosure to comply with due diligence protocols.

· Performance ambiguity: Without a strong track record of outperformance, many of these funds have failed to justify their opacity.

Put simply, the market didn’t ask for this innovation, and it hasn’t gone out of its way to embrace it.

Europe’s opportunity - or inevitable rerun?

The question now is whether Europe will chart a different path.

There are reasons to believe the environment might be more receptive. European investors, particularly professionals and institutions, have long favoured active management over passive, especially in ESG, thematic, and fundamental strategies.

Moreover, the mutual fund culture remains strong, and the ETF market, while growing, is still in a phase of experimentation. A semi-transparent structure might bridge the gap for active managers hesitant to adopt ETFs, allowing them to strike a balance between performance and discretion.

Still, if the U.S. experience is any guide, it won’t be easy. Investors have become accustomed to knowing exactly what they own. Removing that visibility, even partially, may erode one of the ETF's most bankable attributes: trust.

What investors should really watch

Rather than viewing semi-transparent ETFs as a panacea or a revolution, investors should see them for what they are: an incremental extension of the ETF toolkit.

These funds may appeal to a subset of managers and a niche audience of buyers, especially those seeking differentiated strategies or working in less liquid markets. However, they are unlikely to displace traditional active funds or passive ETFs anytime soon.

The industry will be watching a few key indicators:

· Performance: Do these funds meaningfully outperform?

· Distribution: Will platforms and advisers support them?

· Regulatory evolution: Will rules tighten or loosen over time?

Fidelity’s recent launch of Europe’s first semi-transparent ETF adds a noteworthy name to the trend, but not necessarily a turning point.

Final word: A useful tool, not a paradigm shift

Semi-transparent ETFs are a clever structural innovation because they address a genuine concern for active managers and offer a middle ground between full disclosure and full opacity. However, they do not address the ETF industry’s biggest challenge: delivering consistent alpha in a world flooded with low-cost, high-efficiency passive exposure.

If anything, the muted U.S. rollout is a reminder that not every new fund format meets a market need. Ultimately, performance still matters more than packaging, and transparency remains a valuable feature, not a flaw.

As Europe experiments with this new breed of ETF, the real question isn’t whether they’re possible. It’s whether investors actually want them.