Actively-managed, non-transparent exchange-traded funds are now set to become an ETF industry game changer following a major U.S. Securities and Exchange Commission decision on Monday.
The SEC said in a filing it plans to approve Precidian Investments’ non-transparent ETF proposal, which would open the doors to a new category of actively-managed, non-transparent ETF products.
The SEC said it would approve Precidian’s ActiveShares proposal unless its commissioners decide to order a hearing.
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.
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, the filing said.
Precidian CEO Daniel J. McCabe said they are very appreciative of the SEC’s engagement with them to thoroughly vet and address a process that they believe will help the industry better serve investors.
“We applaud the vision of the Commissioners in making this a reality,” McCabe said. “For the first time, investors will be able to access actively-managed ETFs that do not disclose their holdings on a daily basis but trade and operate in a similar manner to other ETFs.”
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.
Many other asset management firms have filed applications with the SEC for exemptive relief to allow them to launch actively managed funds under a non-transparent product structure.
“Over the past few years, these institutions have offered increasingly divergent approaches to satisfy the SEC’s concerns related to ‘non-transparent’ ETFs, including varying terminology to describe differing levels of transparency,” according to a recent ALPS research report titled “Non-Transparent Exchange Traded Products – A Revolution 25 Years In The Marking.”
“There are some similarities and differences between these non-transparent products,” highlights the report. “The obvious differences are in intraday pricing and what is disclosed daily to the AP; both of these features are what the SEC takes issue with the most.”
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