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Will nontransparent ETFs attract the interest of advisors and investors that their creators are hoping for?
"We don't know," said Ed Rosenberg of American Century Funds, which hopes to introduce the first such ETF in the U.S. sometime this quarter. "Opinions don't take shape until you go live." Rosenberg was among several panelists at sessions focused on this new investment vehicle at the recent Inside ETFs conference in Hollywood, Florida.
Variations on the Theme
American Century is one of about 12 mutual fund companies that has licensed the ActiveShares structure for its nontransparent ETFs, also called semi-transparent ETFs because they do disclose their holders though to a more limited extent than traditional ETFs. Other asset managers that have licensed ActiveShares include Blackrock, Goldman Sachs, J.P. Morgan Asset Management, Gamco Investors, Nationwide, Capital Group and Legg Mason, which holds a minority stake in Precidian.
ActiveShares is the first of several nontransparent ETF structures to receive approval from the Securities and Eschange Commission and is the least transparent. It only provides daily disclosure of portfolio holdings to an unaffiliated representative of the authorized participants rather than to the authorized participants themselves, who are key to the creation and redemption mechanism that keeps ETF share prices aligned with their underlying net asset value. Investors will have to wait for quarterly disclosures with a 60-day lag, which is how most active mutual funds operate and most planned nontransparent ETFs expect to.
At the opposite end of the spectrum from the ActiveShares structure is Blue Tractor's Dynamic structure, which has been licensed by The Nottingham Co., a service administrator for ETFs and mutual funds that helps bring white-labeled funds to market through its OBP Capital affiliate. Blue Tractor's structure will disclose all the holdings of the ETF on a daily basis but only about 90% of their weightings.
"Knowing all the underlying names is important as people care more that the social values are reflected in their investments," Blue Tractor Group founder Terry Norman told ThinkAdvisor. It may also be important to advisors. "Under Reg BI, can an advisor fulfill the obligation of acting in the best interest of clients without full transparency?" asks Norman.
Between these two models are myriad nontransparent ETF structures that use a proxy portfolio whose NAV closely matches the fund's actual holdings. They include structures from T. Rowe Price, Invesco, Natixis (using NYSE methodology) and Fidelity. Actual fund holdings would be disclosed quarterly with a 15-day lag for T. Rowe Price, a 30-day lag for Invesco and a 60-day lag for Natixis and disclosed monthly with a 30-day lag for Fidelity.
All these nontransparent ETFs combine the tax efficiency of ETFs with the capabilities of an actively managed mutual fund, without the disclosure of the managers' "secret sauce," to protect against front running and copycats.
Not a Flood but a Trickle
When the SEC first approved the concept, giving the go-ahead to the AdvisorShares structure, there was talk about a flood of these funds coming to market. Now their creators and supporters expect a more gradual introduction.
