Nontransparent ETFs: A Risk-Adjusted Return and Beta Exposure Analysis

The debate over nontransparent ETFs has intensified as investors weigh their potential for enhanced returns against the risks of reduced visibility. Recent academic and industry research offers critical insights into their performance relative to traditional ETFs, particularly in terms of risk-adjusted returns and beta exposure.

Risk-Adjusted Returns: A Mixed Bag

Nontransparent ETFs, including smart beta and buffered strategies, have shown inconsistent results in generating superior risk-adjusted returns. A 2025 study by Cao highlights that smart beta ETFs can influence mutual fund flows by delivering multi-factor alphas, suggesting they reward investors for capturing non-market risk factors like size and value [1]. However, this optimism is tempered by findings from Bowes et al. (2021), which found that only equal-weight and momentum European smart beta ETFs achieved better Sharpe ratios and lower volatility compared to benchmarks [2].

The underperformance of other nontransparent strategies is stark. A 2025 analysis of buffered ETFs—products designed to limit downside risk—revealed that most underperformed passive equity and cash benchmarks, delivering worse returns and larger drawdowns [3]. This raises questions about the efficacy of proprietary strategies in nontransparent ETFs, particularly when fees are higher [4].

Beta Exposure and Transparency Trade-Offs

Traditional ETFs remain the preferred vehicle for investors seeking clear beta exposure. Their transparent, rules-based index construction provides predictability, a critical advantage in volatile markets [5]. Nontransparent ETFs, by contrast, often rely on active management or proprietary methodologies, which can introduce tracking error and manager discretion [1]. For example, the 2025 Spring Investment Directions report emphasizes that traditional ETFs offer simplicity and clarity, aligning with passive investment goals [5].

Yet, some active ETFs have defied the trend. Morningstar’s analysis identifies standout performers like the Neuberger Berman Small-Mid Cap ETF and Jensen Quality Growth ETF, which have delivered strong risk-adjusted returns over the past decade [4]. These exceptions underscore that while nontransparent ETFs carry risks, skilled management can occasionally outperform.

The Investor Dilemma

The 2025 Global ETF Outlook from State Street notes that ETF adoption is accelerating, but investors must navigate the transparency-performance trade-off [5]. Nontransparent ETFs may appeal to those seeking niche strategies, but their complexity and historical underperformance suggest caution. Traditional ETFs, with their cost efficiency and diversification benefits, remain a cornerstone for risk-averse investors [6].

In conclusion, nontransparent ETFs offer unique opportunities but require rigorous due diligence. Investors should prioritize strategies with proven risk-adjusted returns and align their choices with long-term goals, recognizing that transparency often trumps complexity in volatile markets.

Source:
[1] Smart beta, “smarter” flows [https://www.sciencedirect.com/science/article/abs/pii/S0927539825000027]
[2] Financial Risk and Better Returns through Smart Beta [https://www.mdpi.com/1911-8074/14/7/283]
[3] Buffer Madness [https://www.aqr.com/Insights/Perspectives/Buffer-Madness]
[4] Why You Should Pay Attention to Active ETFs [https://www.morningstar.com/funds/why-you-should-pay-attention-active-etfs]
[5] 2025 Spring Investment Directions [https://www.ishares.com/us/insights/investment-directions-spring-2025]
[6] 2025 Global ETF Outlook: The expansion accelerates [https://www.statestreet.com/gb/en/insights/etfs-2025-outlook]