The First Active Semi-Transparent ETFs Launch…with More to Come
ETF Reg Insights
Date: April 10, 2020
On April 2, 2020, American Century Investments launched the first two active semi-transparent ETFs on the Cboe Global Markets electronic stock exchange. These ETFs differ from existing ETFs because instead of disclosing their portfolio before the start of each trading day, they only make such disclosure to a single authorized participant (“AP”) called the “AP Representative,” through which all other APs place creation and redemption orders. American Century Investments’ secret sauce is therefore protected because the AP Representative is the only one privy to the investment portfolio and is contractually required to maintain the confidentiality of the portfolio’s contents.
Instead of developing its own active semi-transparent ETF methodology, American Century Investments licensed Precidian Investments’ proprietary ETF model called ActiveShares. In addition to utilizing an AP Representative, Precidian Investments’ model quotes a consistent intraday price to the market (called a "VIIV" or verified intra-day indicative value). The VIIV combined with actions by the AP Representative are designed to ensure that a narrow spread is maintained between the active semi-transparent ETF’s share price and net asset value per share, a key condition of winning regulatory approval from the SEC. Based on data provided on American Century Investments’ website, both of its new active semi-transparent ETFs have achieved narrow spreads to date.
The Precidian Investments’ ActiveShares model is unique because of its AP Representative/VIIV features. A number of other firms will soon be launching active semi-transparent ETFs but with a different methodology called the proxy portfolio approach. Instead of using the ActiveShares ETF’s approach of hiding the entire investment portfolio, the proxy portfolio ETF approach strikes the balance of offering enough portfolio details to all APs and market participants to effectively arbitrage without jeopardizing the secret sauce of the investment strategy through full disclosure of the true portfolio securities and their weightings. Proxy portfolio ETFs will publish daily “proxy” portfolios comprising securities from the potential universe of portfolio securities the ETFs may hold, but not the exact list of each portfolio security and its weighting.
Firms seeking to launch their own active semi-transparent ETFs have a multitude of options. Many will choose to follow the path of American Century Investments and license ActiveShares or a proxy portfolio solution. Other firms may elect to obtain their own exemptive relief from the SEC to offer active semi-transparent ETFs. A firm could decide to sponsor an active semi-transparent ETF on an unaffiliated trust that already has the active semi-transparent ETF methodology and regulatory approvals in place. In an upcoming ETF Alert, we will explore in detail these and other options for firms seeking to add active semi-transparent ETFs to their product line-ups.
FOR MORE INFORMATION
For more information, please contact:
This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.
This document may be considered attorney advertising in some jurisdictions.
© 2020 THOMPSON HINE LLP. ALL RIGHTS RESERVED.