Any minute now, Precidian Investments, probably through the medium of American Century Investments, one of their licensees, (see interview here) will be announcing the launch of the first of the much-lauded non or semi-transparent ETFs.
It’s been a long-awaited outcome, achieved over many regulatory hurdles for Precidian Investments and its CEO, Dan McCabe. Since getting their exemptive order for the ActiveShares’ structure initial approval in April 2019, the firm has collaborated with its 14 active manager licensees with USD14 trillion in assets under management, drawn from the ranks of some of the biggest fund management groups in the world, including BlackRock, JP Morgan and Goldman Sachs.
Precidian’s ActiveShares is designed to create an actively managed ETF, with its portfolio hidden from potential front runners or free riders. ETFs quote a consistent intraday price to the market, the verified intra-day indicative value (VIIV) but while other ETFs publish every 15 seconds, ActiveShares will publish the VIIV every second.
However, the underlying ETF portfolio holdings will remain secret, with just an authorised participant’s representative (APR) aware of the holdings and using a confidential account to perform all creations and redemptions on behalf of an AP.
McCabe says: “I often think ideas come out of a necessity and we were approached by a company that had a problem with an active mutual fund and once we started working on it, I realised that we needed a next generation mutual fund.”
He believes the ActiveShares’ structure blends the best of both worlds, the mutual fund’s active management capabilities with the efficiencies of the ETF.
He has high hopes for the adoption rate of the semi-transparent ETF, particularly because the end investor, especially in the US, is so familiar with the ETF structure. Of the USD5-7 trillion pool of assets under management in covered by the exemptive order in the US, McCabe believes that up to 50 per cent could move into semi-transparent ETFs over time, or that the mutual fund structure might fall away completely in time.
“I am a big believer that the most efficient vehicles will win so I do think that there should be no difference from a global perspective,” he adds, confirming that he has had conversations with large asset managers from Europe, and also conversations with those most active of fund managers, hedge fund managers.
Existing active investment strategies can be cloned into the active ETF model with the benefit for US investors of lower operating costs, improved tax efficiency, lower potential cash drag, benefits of exchange trading, lower liquidity charges and the elimination of multiple share classes.
For active managers, launching an ETF version of their fund brings no changes in day-to-day responsibilities, but, Precidian says, greatly improved flexibility. Within the US, significant improvement in tax efficiency enables more effective implementation without fear of front-running or loss of intellectual property.
Precidian also claims that their structure diversifies the markets away from concentration in index-based ETFs and associated price discovery challenges, supporting the stated goals of regulators. The availability of additional investment capabilities within the ETF structure can lead to more robust asset allocation models, the firm says.