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First Nontransparent ETFs Start Trading

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After years of review by the Securities and Exchange Commission, the first nontransparent ETFs have come to market. The American Century Focused Dynamic Growth ETF (FDG) and American Century Focused Large Cap Value ETF (FLV) started trading Thursday on the Cboe BZX Exchange, using Precidian Investments’ ActiveShares methodology.

The structure, which American Century labels as “semi-transparent,” allows portfolio managers to manage fund assets without disclosing fund holdings on a daily basis, as required for traditional ETFs, thereby protecting their “secret sauce.” Holdings for the two new American Century ETFs will be disclosed quarterly with a 15-day lag.

Both ETFs are relatively concentrated portfolios of 40 to 60 stocks each. Focused Dynamic Growth invests in what American Century describes as “early and rapid stage large-cap growth companies with the potential to increase in value over time,” and has an expense ratio of 45 basis points.

Focused Large Cap Value invests in “high quality companies that the portfolio managers believe are temporarily selling at a discount,” and has an expense ratio of 42 basis points.

“No ETF has ever been done like this before,” said Ed Rosenberg, head of ETFs at American Century, who views the debut of these first semi-transparent ETFs as the start of an evolution in the ETF space. (American Century and many other asset managers have filed additional applications with the SEC for more nontransparent ETFs, some to trade on the NYSE as well as the Cboe.)

When asked about launching a new product into the current wildly volatile bear market, Rosenberg said, “You can’t control the day-to-day and at some point you have to put the product out there and let it start working.” The launch also provides the firm “the opportunity to develop a track record,” said Rosenberg. “Clients want to see how these ETFs will behave.”

In addition, American Century’s partners for these ETFs were ready to go, according to Rosenberg. They include State Street as custodian, Citadel Securities as the lead market maker, IHS Markit as the calculation agent to verify the ETFs’ intraday indicative value, and Cantor Fitzgerald & Co. as the authorized participant representatives (APRs), who are the only ones to know the actual ETF holdings on a daily basis. 

The portfolio managers for Focused Dynamic Growth are Keith Lee, Michael Li, Prabha Ram, Henry He and Rene Casis. For Focused Large Cap Value they are Phillip Davidson, Brian Woglom, Phil Sundell, Kevin Toney,  Michael Liss and Rene Casis.

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