Precidian Provides Blueprint for Nontransparent Active ETF

January 23rd at 6:30am by Tom Lydon

Active managers have been reluctant to switch into a transparent exchange traded fund structure, but Precidian Investments has filed with the Securities and Exchange Commission for a nontransparent active ETF.

Precidian’s filing outlines the mechanics of how a fund might work and specifics on its design, reports Murray Coleman for the Wall Street Journal.

The filing shows a two-tiered process that shield trades in which a custodian acts as a middleman dealing through a blind trust on behalf of large investors redeeming shares in-kind – currently, institutional investors directly trade with fund providers. Additionally, the net asset values of each ETF would be revealed every 15 seconds, but the NAV would not include actual components. Instead, individual component weights will be disclosed on a quarterly basis.

“A lot of fund companies have made general requests for nontransparent ETFs, but this signals a significant step forward,” Samuel Lee, a Morningstar analyst, said in the article.

For instance, BlackRock, State Sreet, Eaton Vance and T. Rowe Price have all shown interest in a nontransparent ETF structure for actively managed strategies. [Non-Transparent Active ETFs are not a Slam-Dunk]

For fund firms, the allure of non-transparent ETFs is that the portfolio managers would be able to keep their trades a better secret, allowing managers to prevent front-running. However, these non-transparent ETFs need to pass muster at the SEC, and that could be extremely tricky. Even getting plain-vanilla index ETFs through the regulatory approval process involves a lot of time and legal fees.

“The only people who really see a need for nontransparent ETFs are mutual fund companies,” Rick Ferri, founder of investment advisory firm Portfolio Solutions LLC, said in the article. “In a lot of cases, they’re still smarting from a black eye with investors for not getting involved with this part of the market years ago.”  [New Wave of Active ETFs Could Come from Mutual Fund Providers]

The ETF industry is still dominated by passive, index-based ETFs. There are 74 actively managed U.S.-listed ETFs on the market with $14.9 billion in assets, compared to the overall 1,548 ETFs with $1.7 trillion in assets.

For more information on active ETFs, visit our actively managed ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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