Choosing Your Path to the Semi-Transparent ETF Age

“It’s different this time because the new models are actually ETFs,” says Stuart Thomas, Founding Principal at Precidian Investments. This will make it easier for distributors, advisors, and investors to understand the product. “While things might be different under the hood, from the investor’s perspective it is just an ETF,” Thomas notes. “With ActiveShares ® there shouldn’t be a big learning curve for financial advisors or investors and the product should fit seamlessly into the ecosystem.” The fact that they are ETFs should also make it easier for asset managers to adopt the product. “Once you’ve made the decision to create an ETF platform, upgrading to incorporate semi-transparent ETFs is a relatively minor lift,” Ed Rosenberg, Head of ETFs at American Century Investments notes. “ETF managers can consider expanding their product range to include semi-transparent ETFs without reinventing the wheel.” Many Potential Paths All of the approved models take slightly different routes to achieve semi-transparency. The ActiveShares ® model leverages a new Authorized Participant (AP) Representative role that is independent from the AP and ETF, and uses confidential accounts owned by the AP, to buy and sell the ETF’s underlying securities on behalf of the APs. This additional step in the process changes how the APs interact with the market. Typically the AP helps ensure that the ETF’s market price stays in line with the underlying portfolio through the arbitrage mechanism of the creation/ redemption process. With the ActiveShares ® model, rather than delivering securities directly to the ETF, it will be done through the AP Representative. Many of the other models use a proxy portfolio approach that would provide a daily view of a model portfolio, which should mimic the daily return of the ETF. However, there are subtle nuances to the various proposals. Under the Natixis model the proxy portfolio is reported on a lag from the actual portfolio and has a different composition and weighting. T. Rowe Price also utilizes a proxy basket on a lag but incorporates a 15 second indicative Net Asset Value (iNAV) to help with pricing. While the Fidelity model utilizes an optimized tracking basket that has similar exposures to the ETF’s portfolio. Blue Tractor’s approach publishes the portfolio daily but masks the actual weighting of the portfolio. Each of the semi-transparent solutions has benefits and it remains to be seen which one will become the preferred option for the industry. Though, it’s more likely that asset managers will use the solution that best suits their business model. Approved Semi-Transparent ETF Models ActiveShares ® Precidian Investments Shielded Alpha SM ETFs Blue Tractor Active ETFs T. Rowe Price Periodically-Disclosed Active ETFs Natixis Fidelity ETF Basket Creation/ Redemption AP-owned confidential account at AP Representative Proxy Portfolio – Dynamic SSR SM Portfolio Proxy Portfolio – Hedge Portfolio Proxy Portfolio in partnership with NYSE Proxy Portfolio – Tracking Basket Share Pricing Per share VIIV provided every second on actual portfolio holdings Price determined by Dynamic SSR SM Portfolio Price not dependent on IIV Price determined by Proxy Portfolio iNAV provided every 15 seconds Price determined by Proxy Portfolio Price determined by Tracking Basket Holdings Disclosures Before trading, fund discloses holdings to AP Representative and VIIV agent Fund discloses names of all securities in portfolio, but not weighting Fund discloses Proxy Portfolio daily Fund discloses Proxy Portfolio daily Fund discloses Tracking Basket and overlap daily Full Portfolio Disclosure Quarterly Quarterly Quarterly Quarterly Monthly “Once you’ve made the decision to create an ETF platform, upgrading to incorporate semi- transparent ETFs is a relatively minor lift.” Ed Rosenberg Head of ETFs American Century Investments