Content Provided by Rui Wang, CFA, CLS Investment Research Analyst
As the ETF industry keeps booming, more and more traditional asset managers are lured into this business. Unlike index-based ETFs, these asset managers are intended to offer their active management specialty to clients by launching active ETFs.
One of the biggest obstacles for asset managers to launch active ETFs is the transparency requirement. Currently ETFs have to disclose all their holdings on a daily basis. If active managers follow this route, they might face the front-running issue: traders can know what securities the asset managers are buying from daily holding reports.
There are a few proposals from asset managers attempting to solve the challenge of trying to protect trading themes, while providing enough transparency so that market makers can make efficient markets. The chart below summarizes the major proposed methodologies.
|Asset Manager||Holding Disclosure||NAV Disclosure||Key Proposal|
|Precidian||Once a quarter||Every 15 seconds||Blind trust & frequent NAV disclosure|
|Vanguard||Daily||End of Each Day||Disclose representative sample of fund holdings to track fund closely|
|Eaton Vance||Once a quarter||End of Each Day||NAV-based trading to alleviate market makers’ hedging risk|
1. Precidian Investments’ ActiveShares concept for active ETFs
- Disclose portfolio investments quarterly
- Utilize a blind trust between the ETF and the authorized participant seeking to redeem shares
- An intraday estimated net asset value would be disseminated every 15 seconds
2. Vanguard has proposed to release daily representative samples of the fund holdings that will track the return of the ETF share class within a narrow range of tracking errors.
3. Eaton Vance has filed an application with the SEC to launch so called exchange-traded managed funds (ETMFs) which acts like a hybrid of the mutual fund and ETF.
- Disclose holdings once a quarter with a lag of no more than 60 days
- NAV-based trading: the trade prices during the day would be linked to the fund’s end-of-day net asset value +/- a small premium/discount. Buyers or sellers will not know their prices at the purchase, but later after the NAV is calculated
- Market makers do not have risk to hedge during the day because they only have exposure to the NAV prices at the end of each day.
An ETF is a type of investment company whose investment objective is to achieve the same return as a particular market or commodity index, or a basket of assets. An ETF is similar to an index fund in that it will primarily invest in the securities of companies that are included in the selected index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index. While ETFs tend to be lower in cost to other investment companies, such as mutual funds, there are costs that apply. Always research a particular ETF prior to investing in order to determine its fees. Diversifiable risks include, but are not limited to business risk, regulatory risk, and capital risk. An index based ETF is one which tracks a specific benchmark such as the S&P 500, Russell 3000, etc. An active ETF is any ETF managed in an active manner as opposed to a passive manner.
Net asset value, or NAV, is the price per share of a particular mutual fund or ETF. NAV is calculated by dividing the total value of all securities, less liabilities, by the number of shares outstanding.
For Precidian Plan: http://www.etftrends.com/2014/01/precidian-provides-blueprint-for-nontransparent-active-etf/
For Vanguard Plan: http://news.morningstar.com/articlenet/article.aspx?id=193350
For Eaton Vance Plan: http://finance.yahoo.com/news/eaton-vance-etf-structure-could-132259854.html