In the fund universe, it’s often said that structure matters and that’s true of active non-transparent ETFs (ANTs).
ANTs alleviate concerns about daily portfolio disclosure, meaning the funds don’t share portfolios positions on a daily basis as is the case with most traditional ETFs. However, ANTs have daily liquidity that ETFs are known for, something traditional active mutual funds lack.
By not disclosing information about the ETF on a day-to-day basis, this active ETF may face less risk that other traders can predict or copy its investment strategy in what is typically called “front running”. Consequently, by allowing the money manager to maintain his or her secret sauce, this may improve the ETF’s performance.
“Fvrom an investor’s perspective, that’s essentially where the differences end. Both types of ETFs trade on exchanges at prices that fluctuate throughout the day. Semi-transparent versions will continue to offer the cost and tax efficiencies ETF investors have come to expect,” according to JPMorgan. “Behind the scenes, however, semi-transparent managers must operate differently to keep their stock picks confidential while also keeping the ETF running properly. How are shares accurately priced and effectively created/redeemed when the underlying basket of securities isn’t public knowledge? The short answer is, it depends on the ETF structure. Let’s dive deeper into the longer answer.”
Integral to the success of ANTs are mechanics, such as the verified intraday indicative value (VIIV), which is calculated and disseminated every second throughout the trading day by the exchange the ANT trades on.
The VIIV is based on the current market value of the securities in the fund’s portfolio on that day. The VIIV is intended to provide investors and other market participants with a highly correlated per-share value of the underlying portfolio that can be compared to the current market price.
One of the leading ANTs structures is the ActiveShares model courtesy of Precidian.
“Precidian adds a new player to the existing ETF ecosystem, known as an “authorized participant (AP) representative.” As a refresher, with transparent ETFs, an AP knows what’s inside the portfolio at all times and uses that information to create/redeem shares as needed. With Precidian’s model, underlying securities are disclosed only to a representative separate and independent from the AP,” notes JPMorgan. “The AP representative uses a confidential account to create/redeem shares on an in-kind basis, which replicates the tax efficiencies currently available through transparent ETFs. Share prices will be updated in real time every second, compared to the current standard of every 15 seconds. Full portfolio holdings are disclosed to the public each quarter.”