Recently, you have probably heard a lot about the new ETF structures that are revolutionizing the way active managers can use the ETF wrapper. But how exactly do they work?
First, it’s important to note that there are actually five different structures, and they all act a little differently.
To learn more about each, just click the corresponding name for a description and diagram.
Structure: ActiveShares Model
Precidian Invesments
- To protect the identity and weightings of their portfolio holdings, the ActiveShares ETFs sell and redeem their Shares in creation units to an Authorized Participant Representatives (an unaffiliated broker-dealer acting on an agency basis).
- Provides iNAV (“VIIV” or verified intraday indicative value) of the real fund portfolio every second
- For creation/redemption the real fund portfolio is used
- The real holdings are disclosed to the public once per quarter
*From Investments & Wealth Institute “Semi-Transparent Exchange-Traded Funds: A Revolution in Active Management” by Nichole Kramer
Structure: Shielded Alpha Model
Blue Tractor Group
- Uses algorithm to randomly generate weights for 0-10% of holdings
- Does not provide intraday pricing
- For creation/redemption the dynamic SSR portfolio is used
- The real holdings are disclosed to the public once per quarter
*From Investments & Wealth Institute “Semi-Transparent Exchange-Traded Funds: A Revolution in Active Management” by Nichole Kramer
Structure: Actively Managed ETFs
Fidelity
- Uses tracking basket of actual holdings (in differing weights), representative ETFs and cash
- Provides iNAV of the tracking basket every 15 seconds
- For creation/redemption the tracking basket is used
- The real holdings are disclosed to the public every 30 days
*From Investments & Wealth Institute “Semi-Transparent Exchange-Traded Funds: A Revolution in Active Management” by Nichole Kramer
Structure: Active ETFs
T Rowe Price
- Uses proxy portfolio, which would determine at least 80% of the real portfolio’s holdings
- Provides iNAV of the real portfolio every 15 seconds
- For creation/redemption the hedging basket is used
- The real holdings are disclosed to the public once a quarter with a 15 day lag
*From Investments & Wealth Institute “Semi-Transparent Exchange-Traded Funds: A Revolution in Active Management” by Nichole Kramer
Structure: Actively Managed Solution
Natixis & NYSE
- Uses proxy portfolio of actual holdings in differing weights, as well as additional names
- Does not provide intraday pricing
- For creation/redemption the proxy portfolio is used
- The real holdings are disclosed to the public once per quarter
*From Investments & Wealth Institute “Semi-Transparent Exchange-Traded Funds: A Revolution in Active Management” by Nichole Kramer
What’s the Point?
So active management is all about beating the index, right? Well due to regulations, your standard ETF has to provide a daily disclosure of all of its holdings. That makes it pretty easy to copy a strategy by just following the disclosures and buying up the same holdings. With these new structures, it makes it much harder for someone to come along and mimic the strategy, because the holdings aren’t disclosed as frequently.
While some of these strategies are easier than others to reverse engineer, they still offer way more protection to a managers alpha than a standard ETF structure would.
Many are very optimistic about the future for these structures. Because they offer a way for active managers to keep some of their secret sauce, many think that some of the top performing active mutual funds will soon be debuted in an ETF wrapper.
