Different ETF wrappers can have different impacts on intraday liquidity, transparency, expense ratios, and tax efficiencies. That’s why it’s essential for asset managers launching an ETF to choose a wrapper that actually aligns with their investment strategy. 

The better aligned your wrapper, the better your operational workflow and competitive positioning. Use our guide to ETF wrappers below to learn how to evaluate them and choose the right one.

Types of ETF wrappers

Different exchange-traded fund (ETF) wrappers offer different fund structures. Each type has distinct implications for how much your fund costs, operates, and serves investors.

What is an ETF wrapper?

An ETF wrapper, also known as an ETF structure, is the structure that determines how an ETF operates, manages holdings, and delivers returns. The wrapper determines cost profile, tax efficiency, and liquidity characteristics. 

Wrappers cover a number of facets about how an ETF functions:

• Investment management approaches: Is the fund passive or active? 
• Replication methods: Does the fund contain physical holdings or derivatives, or is it a hybrid?
• Transparency levels: Does it report its holdings disclosures daily or quarterly?
• Operational framework: How does the fund handle creation and redemption? How about portfolio management or market making?

The two main types of fund structures are passive and active. Both allow for real-time ETF trades throughout the trading day and offer many of the same benefits for individual investors. They only differ in terms of the issuers or financial professionals who manage the fund.

Passive ETF wrappers

Passive ETF wrappers track a specific benchmark index with minimal deviation. They have dominated the ETF market for decades due to simplicity and cost effectiveness.

Advantages

• Lower costs and lower expense ratios than active ETFs. A lower-cost product may have an edge in gaining purchase with investors.
• Automatically tracks an index. Passive ETFs look to replicate the performance of a specific benchmark index. This requires less human interaction.
• Lower portfolio turnover. Because active managers will tend to make more frequent trades, passive ETFs typically have less portfolio turnover. This means greater tax efficiency and fewer trading fees.

Disadvantages

• Less flexibility than active ETFs. Sudden shifts in the market can often create unique opportunities and challenges. A passive fund will be less likely to have the flexibility to fully capitalize on opportunities or react in real time to market events.
• Can’t outperform the market. By definition, a passive ETF seeks to replicate the performance of a particular slice of the market. 

Active ETF wrappers

Active ETF wrappers give portfolio managers the ability to make investment decisions based on research and market conditions. Due to regulatory changes that have made active management more viable, active ETF wrappers have grown.

Advantages

• More flexible than passive ETFs. Because they are actively managed, active ETFs have more flexibility to react to market volatility and capture opportunities or pivot out of holdings that might be facing unexpected headwinds.
• Can generate higher/better results than the market. While a passive fund seeks to replicate the performance of a specific index, an active fund looks to outperform benchmarks. There is a potential for an active ETF to outperform. However, note that past performance does not guarantee future performance.
• Allow asset managers the opportunity to better mitigate risk. Because the active ETF wrapper can pivot more easily, it gives portfolio managers more options when it comes to risk mitigation.
• Less rebalancing by portfolio managers. Indexes need to rebalance in order to reduce tracking error and accurately capture the slice of the market they seek to capture. Passive ETFs, as a result, will have to rebalance to stay in line with their benchmark index every time the index rebalances. Active ETFs are less beholden to that.

Disadvantages

• Less transparency regarding holdings. Many investors like to know what they own, and active products tend to have less transparency than their passive counterparts.
• More frequent trading leads to higher costs. Active funds tend to trade more, meaning more taxes and associated fees. This means less tax efficiency for investors and often higher costs in the form of expense ratios.

Deciding which to choose comes down to your investment objectives, trading strategy, investment goals, and the types of investors you want to attract. 

For example, are you creating a tax-efficient product? Passive might be a better structure. If you’re looking to create a product that can adapt to volatility on the fly, an active product might be better suited to the task.

Physical, synthetic, and hybrid ETFs

In addition to choosing between active or passive management, asset managers must decide which securities their product will hold. 

1. Physical ETFs hold actual securities in an underlying index.
2. Synthetic ETFs hold financial instruments like derivatives instead of actual securities.
3. Hybrid ETFs contain a combination of physical and synthetic holdings.

Which one you choose will affect the complexity of your operations, the accuracy of tracking, counterparty risk, and investor perception.

How to choose an ETF wrapper

Bringing a new product into the ETF market means structuring it to appeal to investors. You’ll need to consider several aspects of your business operations and goals to determine the ideal ETF wrapper for your product. 

Your management style

Deciding between a passive or active structure depends on your daily operational capacity:

• Actively managed exchange-traded funds require more day-to-day interaction
• Passive structures need less hands-on management

Also, consider your team:

• Do you have portfolio managers with proven active management track records?
• Do you have research infrastructure for active decisions?

Smaller firms may benefit from starting with passive structures to build operational capabilities.

Operational costs and complexities

Assess your resources as an ETF issuer. Can you handle the creation and redemption processes? Can you ensure accurate market pricing?

Converting mutual funds or separately managed accounts has its advantages, such as a performance track record and existing investors. However, it faces greater regulatory hurdles and potential tax consequences.

Active strategies typically require more sophisticated technology, so don’t forget to budget for technology infrastructure: 

• Portfolio management
• Compliance monitoring
• NAV calculation
• Regulatory reporting systems

Level of transparency

Choose your transparency model based on strategy protection and investor preferences.

• Fully transparent: A passive index-tracking ETF wrapper is the most common type of fully transparent product. It requires daily public disclosures of all holdings.
• Semi-transparent: Active ETF managers can opt for a semi-transparent wrapper and will only have to disclose holdings quarterly rather than daily.

Your target investors

Build your product with a specific end investor in mind. For example:

• Institutional investors understand complex derivative structures
• Retail investors prefer straightforward products
• RIAs prioritize transparency and low costs
• Hedge funds and family offices may accept semi-transparent active strategies

If you’re working with financial advisors, they typically evaluate ETFs based on:

• Daily liquidity
• Tight bid-ask spreads
• Clear benchmark comparisons

You’ll also want to consider investment size requirements, taxable versus tax-deferred accounts, and lump sum versus dollar-cost averaging patterns.

Your tax strategy

Consider tax implications for your target investors.

ETF tax advantages

ETFs generally offer tax benefits over mutual funds through in-kind transfers that minimize capital gains distributions. However, tax efficiency varies:

• Passive ETFs generate fewer capital gains (lower turnover)
• Physical ETFs have different tax characteristics than synthetic ETFs

Optimizing for taxable accounts

If targeting taxable accounts, consider:

• Tax-loss harvesting techniques
• Holding period management
• International withholding tax implications
• Treaty benefit optimization for foreign securities

Your underlying securities

The underlying securities within your ETF often drive structure decisions. Different asset classes benefit from different approaches.

Equity ETFs

• Liquid large-cap: Physical replication works well.
• Small-cap or international: Sampling or hybrid approaches reduce costs.

Fixed-income ETFs

Bonds present unique challenges due to over-the-counter trading, market fragmentation, and interest rate sensitivity. Many use sampling methodologies or custom baskets. Active management is particularly valuable for security selection and duration management.

Alternative asset classes

• Commodities: Often require synthetic structures or specialized approaches.
• Currencies: Typically use derivatives.
• Real estate: May hold REITs or use futures.

The liquidity of your ETF shares and the nature of your assets under management can help you determine if you should opt for a fully transparent or semi-transparent wrapper. For this reason, always match your structure to securities liquidity. 

Highly liquid securities support full transparency and efficient arbitrage. Less liquid securities may require semi-transparent structures to protect against predatory trading.

You might like: Best practices for launching an ETF

Regulatory implications of ETF wrappers

Regulatory requirements vary significantly between fully transparent and semi-transparent structures, affecting timeline, costs, and ongoing compliance.

Fully Transparent ETFs

Fully transparent ETFs follow the SEC's Rule 6c-11, providing a streamlined approval process.

Requirements

• Daily disclosure of full holdings and assets under management (AUM)
• Disclosure of premiums and discounts vs. net asset value (NAV)
• Enable arbitrage for price stability and liquidity
• Flexibility to use custom baskets

Advantages

• Faster time to market
• Lower legal costs than exemptive orders
• Standardized approach
• Ideal for first-time ETF issuers

Semi-Transparent ETFs

Semi-transparent ETFs require an exemptive order from the Securities and Exchange Commission, which is a more complex and costly process.

Differences

• Quarterly holdings reporting (vs. daily)
• Choose a proxy portfolio or a confidential basket strategy
• More complex operational and compliance requirements
• May require publishing a tracking basket on your website

Disclosure obligations

• Prospectus must include premium/discount information
• Website must publish bid-ask spread and NAV premium/discount data
• Annual shareholder report requires enhanced disclosures

Timeline and costs

• Exemptive order process: 6-12+ months
• Significant legal fees
• Worth considering only if the strategy genuinely benefits from confidentiality

Learn more: The asset manager’s guide to SEC Rule 6c-11 compliance

How to find the right ETF wrapper for your goals

Every ETF structure has its use case. By understanding your end investor, your strategy, and your capacity as an asset manager, you can determine the most appropriate ETF wrapper for your fund. 

Whatever investment decisions your end investor might be seeking, whether it is portfolio diversification or exposure to a specific asset class, that can help drive how you set up an investment vehicle. Think about your management style and your firm’s strengths and weaknesses as you determine the right product structure.

No matter what kind of product you’re building, having the right index partner can make a huge difference. VettaFi’s award-winning index factory can help you build the product you want in the ETF wrapper that makes the most sense for you.

Up next: 7 tips for cost-efficient ETF operations