The universe of active non-transparent ETFs, also known as ANTs, is rapidly expanding in the U.S. and with some of these funds, which are all in their infancy, finding traction with advisors, there’s likely to be more on the way.
Constructed similarly to flagship investment strategies that have served fund family clients well for decades, the active ETFs use the same portfolio managers as their corresponding mutual funds and employ the firm’s long-standing strategic investing approach, characterized by rigorous research, risk awareness, and independent decision making.
“These innovations began in February 2016 when Eaton Vance launched NextShares funds, which seeks to lower costs more than traditional mutual funds and exhibit tax efficiency similar to that of an ETF without the need for daily portfolio disclosures,” according to Deloitte. “The next major development came in the form of the SEC approving Precidian Investments’ ActiveShares ETF model in May of 2019. The ActiveShares structure allows the portfolio to be disclosed only to “Authorized Participant Representatives,” a new intermediary in the value chain that sits between the fund managers and the authorized participants. This new role conducts all the buying and selling of shares confidentially and independently of Authorized Participants to protect the intellectual property of the investment manager.”
ANTS complement an issuer’s traditional mutual fund offerings and deliver the key features associated with existing ETFs that some investors may prefer, including continuous daily trading, real-time market determined pricing, and tax efficiency.
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.
“The degree of success of next generation ETFs depends on how investment managers are able to distribute these products while keeping the costs low,” notes Deloitte. “Compared to an index ETF, investors are likely to need more education and guidance on the unique portfolio characteristics and risk profile of each new active ETF. Also, investors may buy non-transparent ETFs for the strategy rather than a specific basket of securities. Advisors will likely play a greater role in terms of explaining the product strategy to investors.”