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Semi-Transparent ETFs Could Revolutionize Active Management

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The actively managed ETF space could experience rapid growth as the Securities and Exchange Commission reviews and approves new non-transparent ETF structures aimed to protect these active strategies.

“Approval of five actively managed non-transparent, or semi-transparent, ETF models is good news for active managers looking for lower cost and more tax efficient alternative product structures,” according to a SS&C ALPS research note, titled Semi-Transparent Exchange Traded Funds: A Revolution in Active Management.

“Ultimately, the model(s) that may be embraced by market participants is still unknown and will take some time to determine. One thing is for certain, the revolution in active management continues to march forward,” Nichole M. Kramer, SS&C ALPS, said.

So far, Precidian Investments’ ActiveShares received SEC approval on April 4, 2019. The Authorized Participant Representative who acts as an agent on behalf of the Authorized Participant to access a confidential daily file from the trust. Additionally, the verified indicative intraday value is used as the pricing calculation based on the bid/ask midpoint, disseminated at one second intervals throughout the day.

Blue Tractor’s Shielded Alpha patent pending algorithm allows managers to shield their strategy by generating varying weights for holdings within the creation/redemption basket each night, which is then delivered to the NSCC as the daily creation basket. The goal is to shield the portfolio’s alpha strategy.

The Actively Managed Solution/ Periodically-Disclosed Active ETFs from NYSE/Natixis allows the PM to generate a Proxy Portfolio derived from an optimization of different composition and weights than the fund’s actual holdings through a proprietary software developed with Axioma. The goal is to provide an intraday performance of the fund without disclosing the composition of the actual fund holdings.

T. Rowe Price’s Active ETFs offer a Proxy Portfolio methodology will have a “minimum weightings overlap of 80% with the fund’s portfolio at the beginning of each trading day.” Additionally, an intraday estimate of each fund’s NAV will be disclosed every 15 seconds.

Fidelity’s Actively Managed ETF also follows a Proxy Portfolio model where a “Tracking Basket” is used for the creation/redemption basket and will be constructed using a mathematical optimization process. The exemptive relief filing notes a daily disclosure of the Tracking Basket’s INAV, along with a Proxy Overlap percentage. Fidelity will also release holdings each month on a 30-day lag.

Eaton Vance’s new patented methodology, the Clearhedge Method, is a variation of the Proxy Portfolio methodology where it will generate a daily disclosed create/redeem basket and a NAV Reference Portfolio to to act as a proxy for portfolio holdings. Eaton Vance will also establish a facility for market makers to arbitrage a Fund’s shares through a NAV Hedge Completion Swap with the Fund.

Additionally, Invesco’s Actively Managed Substitute Basket uses a proxy portfolio it terms a Substitute Basket, which will exclude certain securities in the portfolio, especially those the fund manager is actively looking to purchase or sell to protect against the risk of front-running or freeriding.

“While asset managers now have a choice of models to consider for launching their active strategy in an ETF wrapper, there are a few additional steps still in process. Specifically, additional approvals to list on an exchange will be required from the Trading and Markets division of the SEC, which can take up to 240 days,” according to SS&C ALPS.

Click here to read the full whitepaper, Semi-Transparent Exchange Traded Funds: A Revolution in Active Management.

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