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Market volatility underlines need for transparency, says Blue Tractor founder


Volatile markets have raised questions for potential providers of semi or non-transparent ETFs in the US, with the predicted launch of these products appearing to be on hold in the short term.

Volatile markets have raised questions for potential providers of semi or non-transparent ETFs in the US, with the predicted launch of these products appearing to be on hold in the short term.

Terry Norman, founder, of Blue Tractor Group and provider of the Shielded Alpha route to the new ETFs, believes that the unfolding market volatility is giving the marketplace a real-time lesson in the continued need for full transparency in ETF underlying security names.

Shielded Alpha brings ‘less than fully transparent’ ETFs to the market by disseminating to the market a daily creation basket which will consist of 100 per cent of the securities in the fund’s actual portfolio but not their correct portfolio weightings.

In January 2020 Blue Tractor announced series trust company Nottingham as its first licensee. Since then it has signed up one more to be announced shortly and anticipates announcing two more licensees over the next month or so. Norman says: “Market conditions are driving more interest in ETFs as retail and institutional investors see the markets plummeting and if they want to sell their mutual funds they can only do so at the close of trading at the NAV, so interest in ETFs is likely increasing because of its inherent intraday liquidity.”

The long bull run’s gains have been completely wiped out overnight, Norman says. “Everyone is back to square one so the constant returns of passive investing have been wiped out and the interest in active management through ETFs will increase.”

Norman believes that the ETF structure has held up amazingly well. “And key to that are two things: the guys in the pits who have their scars from back in the day and have the experience to weather these things and also have the transparency they require so they can see what’s in front of them.” 

Norman believes the Blue Tractor structure will stand out because it offers market makers transparency. “We are confident that if Blue Tractor Shielded Alpha ETFs were in the market they would be trading well with tight spreads and liquidity would be there,” Norman says. “The more information you provide to the market through transparency, the easier it is for market makers and authorised participants to conduct efficient primary and secondary markets.”

Norman is hopeful for a Blue Tractor semi or non-transparent ETF to be launched by the fourth quarter of this year.

He notes that a number of wire houses are most concerned with the client experience in investment – they want their clients to have a consistent experience in all types of markets.

“Market makers love our structure as they can see what they are actually hedging.”

The other routes to creating the new ETFs have required an authorised participant to have a representative that sees the underlying portfolio and creates a proxy version.

Precidian’s ActiveShares non-transparent ETF requires an authorised participant to enter into an agreement with a “representative broker” for trading the creation basket.  

“What if the AP representative broker receives the portfolio but can’t trade some of the securities because, for example, they are on a restricted list? They will then have to pass some of the trading on to another broker and while markets are whipping around in a highly volatile state, that could be disastrous. In moments the market could fall 500 points and then what are these traders supposed to do. From discussions we’ve had with the market, many are very concerned that spreads will be very wide with these structures.”

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