With more traditional mutual funds eying the exchange traded fund 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 asset management firms have filed applications with the Securities Exchange Commission for exemptive relief to allow them to launch actively managed funds under a non-transparent product structure. However, only two of these non-transparent structures, Vanguard’s patented fund structure and Eaton Vance’s NextShares exchange traded managed funds have gained SEC approval.
“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 new ALPS research report titled “Non-Transparent Exchange Traded Products – A Revolution 25 Years In The Marking“.
Here are highlights from the ALPS research report on the topic:
Vanguard ETFs are a “share class” of a Vanguard index mutual fund and rely on an “opaque” transparency where holdings are revealed on a month-end basis with a 15-day lag.
Eaton Vance NextShares ETMF is another SEC approved non-transparent actively managed exchange traded product available. Potential investors should be aware that these ETMFs are not to be confused with exchange traded funds, or ETFs.
Precidian ActiveShares is a strong contender to NextShares and incorporates a proposed “AP Representative” structure. The structure will also provide a verified intraday indicative value or “VIIV” on one second intervals throughout the trading day. This makes the ActiveShares model unlike any active managed ETFs on the market today.
Blue Tractor Group Shielded Alpha ETF does not disclose specific weights but it does show what securities are held, so the structure may be seen as a nearly-transparent investment tool. The daily published basket will disclose 100% of the stock names in the actual portfolio and it will have a minimum 90% overlap in asset value with the actual portfolio. BTG developed a proprietary algorithm to help shield the alpha generation strategy for potential fund managers.
Fidelity’s Actively Managed Exchange Traded Active Fund or AMETF is based off a closed-end fund management design and utilizes a “tracking basket”. The structure includes a proposed tracking basket that will be comprised of the fund’s recently disclosed portfolio holdings and representative ETFs. Additionally, it will utilize a mathematical optimization process to minimize deviations in return of the tracking basket relative to the fund.
T. Rowe Price’s Hedged Portfolios is based off a “hedged portfolio” to closely track the NAV. The money manager proposes the daily disclosure of a “Hedge Portfolio,” whose value is expected to closely track the underlying NAV of the fund and “each fund will consistently invest such that at least 80% of its total assets at the time of purchase (including borrowings for investment purposes) will overlap with the portfolio weightings of its identified Hedge Portfolio.
NYSE/Natixis’s Periodically-Disclosed Active ETFs generates a Proxy Portfolio with different composition and weighting than the fund’s actual holdings by utilizing holdings in a lag. The Proxy Portfolio will, according to the application: “(1) allow for effective hedging by market makers that will have the effect of keeping share bid/ask spreads within a narrow range that will foster liquid share markets, and (2) support arbitrage activities by Authorized Participants and other arbitrageurs that will have the effect of keeping Fund share trading prices reasonably aligned with Fund NAV per share.”
“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.”
To download the full PDF report, visit https://alpsinc.com/insights/nontransparent-exchange-traded-products-revolution.