The Reality of Semi-Transparent ETFs: Why Investors Have Moved On

The Structural Challenges of Semi-Transparent ETFs

Despite initial optimism, semi-transparent ETFs have failed to gain traction globally. According to ETFGI, as of Q3 2024, semi and non-transparent active ETFs represented just $14 billion of the more than $1 trillion in active ETF assets worldwide. Meanwhile, fully transparent active ETFs continue to dominate new product launches.

Why has the semi-transparent model struggled? The key issues are:

• Higher Fees: Semi-transparent ETFs often come with higher expense ratios due to the complexity of managing these structures.
• Inefficiencies in the Create/Redeem Process: Unlike traditional ETFs, semi-transparent models require additional intermediaries (e.g., AP representatives) to facilitate transactions, which adds cost and friction to the process.
• Less Transparency = Wider Spreads: Market makers and liquidity providers rely on full daily transparency to price ETFs efficiently. When they don’t have full visibility, they widen bid-ask spreads, increasing indirect costs for investors.
• Limited Institutional Adoption: Many institutional investors prioritize liquidity and cost efficiency. The uncertainty around pricing and execution in semi-transparent ETFs has largely kept them on the sidelines.

The Market Has Already Spoken

The U.S. experience shows that investors overwhelmingly prefer fully transparent active ETFs over semi-transparent alternatives. Many issuers that once championed the semi-transparent model have quietly pivoted, launching traditional active ETFs instead—offering the same active strategies without the additional costs and inefficiencies.

While the CSSF’s recent move may encourage a handful of European issuers to test the waters, the broader question remains: will investors actually allocate capital to these products? If the U.S. market is any indication, the answer is likely no—unless structural challenges around fees, liquidity, and trading costs are resolved.

Final Thoughts

Transparency has been a key pillar of ETFs’ success. The ability to see holdings daily, ensure efficient pricing, and access deep liquidity are all reasons why ETFs have thrived. Semi-transparent structures attempt to shield active managers from front-running, but they do so at the expense of higher costs and reduced efficiency—outcomes that investors ultimately reject.

For European issuers considering semi-transparent ETFs, the real question isn’t whether they can launch them—it’s whether investors actually want them. And based on what we’ve seen in the U.S., the market’s response has been a resounding no.

About the Author

Nicholas Phillips | President of ETF Capital Markets Advisors LLC
With over 25 years of experience in ETF market making and capital markets, Nicholas Phillips is recognized as a subject matter expert in the ETF industry. He started his career spending the first ten years as a lead market maker for SIG and Goldman Sachs.

At the helm of MCAP LLC's ETF Desk, Nicholas built and scaled the division, enhancing its operations through innovative pricing and risk models, and robust relationships with market makers and issuers. His tenure at Van Eck Associates as Director of ETF Capital Markets further solidified his expertise, managing critical facets of operations and deepening connections within the trading community.

Beyond market making, Nicholas is an avid content creator, sharing insights that demystify complex market dynamics. He is keen on exploring board member roles that benefit from his extensive background and forward-thinking approach to ETF strategies. His dual US/Ireland citizenship complements his global perspective, enriching his professional endeavors in diverse markets.

1. Lawes, Toby. "First Semi-Transparent ETFs Filed with Lux Regulator but Overall Interest Limited." ETF Stream, February 27, 2025.

Disclaimer

Please note that this article reflects the author's personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.