Blue Tractor Plans to Shake Up ETF Industry With New 'Wrapper' | ETF Trends

A new ETF ‘wrapper’ that facilitates management of actively managed portfolio strategies within an ETF rather than in a traditional mutual fund is one step closer to coming to market.

The SEC issued a preliminary notice of approval on Thursday for Blue Tractor’s Shielded Alpha℠ exchange-traded fund structure. Formal approval is anticipated on or about Dec. 10, 2019.

The Shielded Alpha℠ structure is a ‘wrapper’ has many benefits to advisors and investors alike, including lower cost, greater tax efficiency and intra-day liquidity.

Similar to a fully transparent active ETF, the Shielded Alpha℠ wrapper is a highly transparent structure designed to ensure efficient primary and secondary market trading.

However, unlike a transparent active ETF that publishes its full portfolio daily, the Shielded Alpha℠ structure uses proprietary math to generate a published daily creation basket, based upon all the security names, that allows that allows an advisor’s alpha generation strategy and portfolio trading execution to remain fully opaque to predatory traders, fully eliminating the risk of reverse engineering and associated front-running and free-riding. Implementation of a Shielded Alpha℠ ETF is streamlined and efficient because all workflow to generate the daily creation basket is done using Blue Tractor’s cloud-hosted platform.

Simon Goulet, Co-Founder of Blue Tractor, told ETF Trends the Shielded Alpha ETF structure allows portfolio managers to retain full control of their confidential information.

“There is no need to share portfolio information under NDA with third party service providers or inclusion of an AP Representative account,” Goulet said. “These things only add friction and inefficiencies to the workflow necessary to operate and manage an active ETF.”

Goulet said they believe the fund industry is excited to have additional choice with respect to novel wrappers for facilitating active portfolio strategies within an ETF.

“ETF transparency, manifested by daily disclosure of the portfolio through the published creation basket, is important because it provides investors and their financial advisors insight into fund holdings and it provides market makers and other liquidity providers with the information they require to conduct efficient primary and secondary markets, especially important in high volatility markets,” he said. “ETF transparency has been a key cornerstone of ETF success to date.”

The Shielded Alpha℠ ETF wrapper is differentiated from other competing non-transparent and/or semi-transparent wrappers, including:

  • Shielded Alpha℠ is a highly transparent ETF;
  • All workflow to generate the creation basket is hosted in the Blue Tractor cloud;
  • The investable universe for a Shielded Alpha℠ ETF may include foreign securities; and
  • Using the cloud software, advisors can manage the daily creation basket to lower trading costs, enhance capital gains tax efficiency and fully obfuscate trading execution when building or exiting portfolio positions.

Goulet said they are confident that Blue Tractor has raised the bar.

“Advisors wishing to offer investors proprietary actively managed portfolio strategies within an ETF wrapper can now license the Shielded Alpha℠ ETF wrapper and its cloud-hosted service,” he said.

In pursuit of SEC approval for the Shielded Alpha℠ ETF wrapper, Blue Tractor said they received constructive guidance and encouragement from numerous ETF market participants, including major market making firms, listing exchanges, many fund advisors and custodial banks, distributors, fund administrators, fund supermarkets, wirehouses and broker dealers, ETF consultants and pundits and the financial press.

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