ActiveShares Looks to Make Big Waves for Actively Managed ETFs

Precidian Investments is making waves in the exchange traded fund industry, bringing actively-managed, non-transparent ETFs to market through its ActiveShares structure.

Mutual fund companies wanting to get into the ETF game now have the ability to offer their brand of active management in an ETF wrapper without having to lift up the hood everyday to show the intricacies of their strategy.

“With our structure, we are actually giving perfect pricing transparency on a second-by-second basis, which is actually a significant improvement over today’s IIV that most ETFs put out,” Stuart Thomas, Founding Principal, Precidian Investments, said, referring to the intraday indicative value or indicative net asset value that reports prices on the underlying assets of an ETF’s portfolio every 15 seconds.

The Precidian funds will disclose daily holdings only to a new subset of professional trader called the “authorized participant representative” in order to facilitate the process of creation and redemption of ETF shares.

ActiveShares will enable fund managers to combine the potential for alpha generation – traditionally associated with active mutual funds – with the simplicity, cost-efficiency and tax benefits of ETFs.

Because it is an ETF, ActiveShares requires no new operational changes and fits seamlessly into existing platforms. This makes it easy for licensees to provide active investment strategies in an ETF structure.

With more traditional mutual funds eyeing the ETF space but remaining reluctant to give up their secret sauce under the transparency of the ETF investment vehicle, many are looking into non-transparent exchange traded products as a way to combine the best of two worlds.

“There are no limitations – a lot simpler than you’re traditional mutual fund. We’ve eliminated share classes. And of course, there are a lot of efficiencies that the ETF wrapper brings to the actively managed space,” Thomas added.

Precidian’s ActiveShares functions in a similar fashion to existing ETFs by quoting a consistent intraday price to the market (called a “VIIV” or verified intra-day indicative value). While all other ETFs publish an IIV/IOPV every 15 seconds, ActiveShares will take it a step further and publish the VIIV every second.

Many other asset management firms have also filed applications with the SEC for exemptive relief to allow them to launch actively managed funds under a non-transparent product structure. Many see the benefits and efficiencies associated with the ETF structure and hope to also jump on the booming growth in the up-and-coming fund segment.

ETFs bring an added tax efficiency that isn’t enjoyed by mutual funds. Don’t expect actively managed mutual funds to go away, it’s just that you might be able to get one portfolio manager in your choice of wrappers.

Watch the full interview with Stuart Thomas:

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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.