(Bloomberg) -- Active managers have captured 18 percent ofCanada’s ETF market compared with just 1 percent in theU.S., the result of a regulatory advantage that lets fund managerskeep their strategies close to their vest.

Actively managed exchange-traded funds make up C$26 billion($20.3 billion) of Canada’s C$141 billion ETF market.

In the U.S., active ETFs make up only $39 billion of the$3.25 trillion market, according to data compiled by Daniel Straus,vice-president of ETF and financial products research at NationalBank Financial.

Unlike traditional ETFs that track indexes, actively managedETFs allow for individual stock selection, potentially offeringhigher reward for higher risk.

Their strategies run the gamut from ginning up payouts throughdividend ETFs, increasing diversification with emerging markets tomore exotic strains like the Horizons Active A.I. Global EquityETF, which is run using artificial intelligence.

The reason for Canada’s embrace of active management is anobscure regulatory advantage.

In Canada, which launched the world’s first ETF in 1990,actively managed ETFs are treated the same as mutual funds.

This means managers only have to provide quarterly disclosure oftheir top 25 holdings and semi-annual disclosure of their fullportfolio within 60 days of the end of the period.

By contrast, all U.S. ETFs have to disclose their holdings daily-- a rule that some fund managers are asking the Securities and Exchange Commission to bend.

“That has really hindered active managers in the U.S. fromgetting into the ETF space,” said Krista Matheson, head of ETFs andstructured products at Manulife Investments, which launched itsfirst ETFs earlier this year. “If you’re a true active manager, youdon’t want to disclose your holdings on a daily basis.”

The fear that outside investors will mimic the moves of anactive manager without investing in their fund -- and paying theattendant fees -- has also kept the U.S. market small, said RajLala, chief executive officer of Toronto-based Evolve Funds GroupInc., which recently launched the Evolve Active Canadian PreferredShare ETF.

“The big managers in the U.S. say there’s not a chance that I’mgoing to run an active ETF,” Lala said. “One, I’m going to showeverybody what I’m holding and what I’m trading, so I’m giving awaymy secret sauce, and two, it potentially opens up the door forfront-running.”

Actively managed funds are growing faster than Canada’s ETFmarket as a whole (see chart, next page):

Assets in active funds have grown at an annualrate of 32 percent for the past five years compared with 20 percentfor all ETFs, according to Straus.

That’s “faster than any country in the world,” said SteveHawkins, co-CEO of Horizons ETFs Management Canada Inc., whichoperates 79 ETFs and has C$8.9 billion in assets undermanagement.

The difference between the two countries has created a“regulatory arbitrage” that is encouraging fund managers fromaround the world to bring active strategies to Canada first, saidHawkins. Horizons offers 32 active ETFs with focuses ranging fromCanadian municipal bonds to natural gas.

Canada’s regulations have allowed Horizons to create productsthat look like mutual funds, and "package them in a more efficientETF wrapper," said Hawkins.

"The rest of the world still has a lot to catch up to withrespect to the foresight of our regulators in allowing us to launchproducts like this," he said. "We think is a very good thing forthe Canadian marketplace as a whole."

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