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Portfolio > ETFs

SEC Gives Final Nod to First Nontransparent ETF Strategy

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The rush of nontransparent ETFs may have just begun.

On the same day that Precidian Investments announced it had been granted approval from the Securities and Exchange Commission for its nontransparent ETF structure, known as ActiveShares, American Century Investments announced it had filed with the SEC to trade  “semi-transparent ETFs that will utilize the ActiveShares methodology.”

American Century is one of 10 asset management firms that has licensed the ActiveShares methodology from Precidian, and 20 other asset managers are in discussion with Precidian to do the same, according to Daniel McCabe, the firm’s chief executive.

“ActiveShares will enable active managers to offer new and existing strategies in an ETF vehicle, combining the best of active management with the many benefits of an ETF,” McCabe said in a statement. The 10 asset managers that already have signed contacts with Precidian account for 25% of the active U.S. equity mutual fund market, according to the firm.

Unlike most ETFs, which are passive investments that disclose their holdings daily, nontransparent ETFs are actively managed funds that disclose their holdings with a lag, but they have the same tax efficiencies of ETFs. In the case of ETFs that use Precidian’s structure, holdings will be disclosed quarterly with 60-day lag, like most mutual funds.

The SEC approval of the Precidian Investments’ ActiveShares structure and American Century filing was the talk of Tuesday’s ETFs Global Markets Roundtable conference in New York.

SEC Commissioner Hester Peirce, who gave the lunch keynote address, said she hopes the agency “moves expeditiously on the remaining requests for exemptive relief” for similar ETFs.

Jillian DelSignore, head of U.S. ETF distribution at J.P. Morgan Asset Management, said her firm was “excited to bring its capabilities into this unique structure.”

But Andrew Upward, ETF strategist at Jane Street Group, a market maker in ETFs, had a more mixed reaction. The SEC’s approval of Precidian’s structure “will bring new a new swatch of active managers into the ETF realm” but also “probably more expensive liquidity,” said Upward.

Since market makers in these ETFs will not know exactly what the funds hold, they will compensate for that additional risk with wider spreads, explained Upward.

In its filing with the SEC, American Century is asking for exemptive relief to trade initially two nontransparent ActiveShares ETFs: the American Century Focused Dynamic Growth ETF and the American Century Focused Large Cap Value ETF. The filing notes, however, that the firm is also requesting relief for “any other existing or future registered open-end management investment company or series” that American Century advises or controls and operates as an ActiveShares ETF.

An American Century spokesman, citing the prescribed quiet period, could not provide any additional information.

Other fund companies that have already licensed ActiveShares and could potentially also file with the SEC soon include Legg Mason, which holds a minority stake in Precidian, working with its affiliate ClearBridge Investments, Capital Group, J.P. Morgan, Nationwide, Gabelli, Columbia and Nuveen.

In addition, multiple asset managers have already filed for exemptive relief with the SEC to trade nontransparent ETFs of their own including Fidelity, T. Rowe Price, Blue Tractor Group and Eaton Vance.

A recent Cerulli Associates survey of “product heads” from 35 asset managers found that 46% indicated they would build nontransparent ETF capabilities within a year if the SEC approved the ActiveShares proposal from Precidian. More than half of expect to launch a nontransparent actively managed equity fund while 30% expect to launch a similar strategy for fixed income investments.

The question for these unconventional ETFs then will be whether they can attract the interest of investors — and advisors — who have embraced ETFs in large part because they are fully transparent. To be continued….

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