First Non-Transparent ETFs Begin Trading

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 and American Century Focused Large Cap Value ETF started trading on April 2 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, who are the only ones to know the actual ETF holdings on a daily basis.

Vanguard’s Robo-Advisor Pilot Expands

The Vanguard Digital Advisor is now moving beyond its original pilot to an expanded one, allowing current Vanguard brokerage clients as well as anyone who signs up for a Vanguard brokerage account to access the service. A $3,000 asset minimum is required.

The expanded pilot is “part of the test and learning development process” for the robo-advisor. according to a spokesman.

“We will seek feedback from clients as we expand and enhance the service’s functionality and capability in advance of making it available to all investors later this year,” he said. On its website, Vanguard Digital Advisor identifies three forthcoming features: helping clients prepare for emergencies, manage debt, and manage extra cash — invest or pay down debt.

As described in its original brochure, the Vanguard Digital Advisor will have discretion to invest client assets in four core building block ETFs for an all-in expected fee of 20 basis points. That’s cheaper than most all-digital advisory services, and its $3,000 minimum is smaller than that of most robo-advisors, though not all.

Digital Advisor will recommend varying combinations of the four Vanguard ETFs — the Total Stock Market, Total International Stock Market, Total Bond Market Index and Vanguard Total International Bond Index ETFs (collectively referred to as the “Four Totals”) — based on an investor’s financial profile, investment preferences and time horizon, risk tolerance, goals and current asset mix.

Also, the Digital Advisor will consider outside accounts of a client for purposes of goals forecasting but not investment recommendations, and it will eventually be available to 401(k) participants if their plan fiduciary approves the service.

Whether investors will be interested in the offering now, during an extremely volatile bearish stock market, is unclear. This is a time “when a little human hand-holding and advice is needed more than ever,” said Dan Wiener, editor of The Independent Adviser for Vanguard Investors, who encountered technical difficulties when he tried out the Vanguard Digital Advisor recently.

Still, Wiener said, the computer “dashboard” appeal of a $3,000 minimum and all-in fee of 0.20% will attract “young, inexperienced and low-minimum investors” in the coming months, though he’s not sure it should. “Do you really need to pay Vanguard a fee to build a four-fund portfolio that in many ways mimics one of their long-dated Target Retirement funds like Target Retirement 2065 (VLXVX)?”

BNY Mellon Grows USCF Relationship

BNY Mellon expanded its ETF relationship with United States Commodity Funds and completed the asset conversion onto BNY Mellon’s ETF Servicing platform.

BNY Mellon serves as the funds’ custodian, accountant, administrator and transfer agent, the firms said.

USCF specializes in commodity and alternative exchange-traded products, including the United States Oil Fund, LP, which trades on the NYSE Arca (USO, with a 0.79% net expense ratio), introduced in 2006.

“BNY Mellon is focused on delivering digital exchange-traded product solutions aimed at driving efficiencies across the ecosystem and working closely with our partners to develop long-term solutions for the industry,” according to Jeff McCarthy, global ETF product head at BNY Mellon Asset Servicing.

Direxion Reduces Leverage on ETFs

Direxion reduced the exposure level in 10 of its leveraged ETFs.

The Direxion Daily Bull and 3X Shares ETFs now seek daily exposure, before fees and expenses, of +200% or -200% of each fund’s respective benchmark index, down from +300% or -300%. Fund names were also changed, to reflect the shift from 3X Shares to 2X Shares.

The change affects country funds and commodity funds. Among the former are the Direxion Daily MSCI Brazil Bull 3X Shares and Russia Bull 3X Shares.

The commodity funds are Gold Miners Index Bull 3X Shares, Gold Miners Index Bear 3X Shares, Junior Gold Miners Index Bull 3X Shares, Junior Gold Miners Index Bear 3X Shares, Energy Bull 3X Shares, Energy Bear 3X Shares, S&P Oil & Gas Exp. & Prod. Bull 3X Shares and S&P Oil & Gas Exp. & Prod. Bear 3X Shares.

Bernice Napach is ThinkAdvisor.com’s senior writer and can be reached at bnapach@alm.com. Jeff Berman is a staff reporter at ThinkAdvisor. Reach him at jberman@alm.com.