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‘No brainer’ solution to protecting portfolio alpha


Blue Tractor Group | Best US Semi-Transparent Structure Provider

Terry Norman and Simon Goulet are co-founders of Blue Tractor Group, a New York City- based fintech that conceived and commercialised the Shielded Alpha semi-transparent ETF structure for active portfolio managers.

The Shielded Alpha ETF wrapper provides all of the advantages of a fully transparent ETF while always protecting – or shielding – the confidential investment portfolio and trading strategy.

The foundation for the Shielded Alpha ETF structure goes back to 2015, when UK-based Norman read the SEC’s public rejection of another group’s application for what was then termed a non-transparent ETF. “The genesis was when I read the SEC’s rejection letter to that application,” Norman recalled. “I got on my tractor and while in my fields cutting hay, was thinking about the objections that the SEC had raised, and I thought ‘I can solve this’.”

After initially developing a mathematical solution for a fully non-transparent structure, the pair pivoted and developed an ETF wrapper that focused on transparency; yet still provides complete portfolio protection Under Blue Tractor’s unique approach, the daily ETF creation basket discloses all of the underlying portfolio names (hence the transparency); but the actual portfolio weights are scrambled each day through a proprietary algorithmic process hosted in the cloud.

Goulet notes: “The SEC approved six semi-transparent ETF structures in 2019 and all were from well established, huge fund complexes and listing exchanges, except for Blue Tractor. We were the ‘new kids on the block’ and are clearly delighted that portfolio managers are choosing us and putting their trust in our semi-transparent approach.”

Goulet believes the semi-transparent wrapper approvals demonstrate that the ETF industry is dynamic and always advancing to meet both the needs of the advisors and portfolio managers, as well as bringing more product choice to investors.

He says: “The Blue Tractor wrapper allows active portfolio managers who are reticent to enter the ETF space to launch product that confers to them and their investors all of the benefits of the transparent wrapper, but also the additional benefit of portfolio protection.”

Goulet cites three trends as the semi-transparent market has matured. “The first semi-transparent ETFs were launched in Spring 2020 and were typically plain vanilla domestic products, but since then we’re seeing an increase in more exotic approaches as portfolio managers understand that this is just like any other ETF and lots of different strategies can fit into this wrapper.”

Secondly, Goulet notes that custom basket relief for some of the semi-transparent ETFs – including Blue Tractor – means that the structure is as tax efficient as any fully transparent active ETF. And finally, semi-transparent ETFs are gaining support from the larger broker/dealers and wirehouses, which means distribution friction is starting to dissipate.

Looking forward, Norman predicts there will be more conversions of actively managed mutual funds to ETFs and he feels they should be going the semi-transparent route. “Once RIAs and investors become more informed, they will talk with their wallets,” he says. “It’s a simple question of do you put investor dollars into an ETF wrapper with or without an alarm system that protects the portfolio manager’s confidential strategy? It’s a no brainer.”

Norman and Goulet hope that the next 12 months will see SEC approval of Blue Tractor’s application for a long/short semi-transparent structure and they also see potential take-up of semi-transparent ETFs in Europe and perhaps Australia and Canada.

Norman says that the significance of winning the ‘Best Semi-Transparent ETF’ category ETF Express US awards should not be underestimated. “Not only does it confer the status on the ‘Shielded Alpha’ ETF as No. 1 in the United States but, by inference, it also confers a No. 1 status in the world. Such recognition will undoubtedly help us achieve our goal of ‘going global’ – bringing further choice and investment efficiency to a worldwide audience,” he says. 

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