Fund manager Fidelity Investments has applied to launch a new kind of non-transparent active exchange-traded fund, arguing that the hybrid model will combine the best features of a traditional ETF and a closed-end fund.
Instead of revealing the ETF’s constituents in real time, the proposed new fund would publish a daily ‘tracking basket’ which approximates the holdings in the fund’s portfolio. This allows the fund to trade on exchange while protecting the fund manager’s proprietary research.
The Boston-based investment company has applied to the US Securities and Exchange Commission to launch what it calls a “new kind of closed-end management company” which will trade like a stock on exchange but will only disclose its underlying holdings after a 30-day delay.
Active fund managers have long disapproved the notion of giving up the recipe to their secret sauce by listing all fund holdings in real time. ETFs, which traditionally track an index, ensure a list of their underlying holdings are always available.
Just like an active manager, Fidelity would consider a company’s position in the market, growth potential and valuation in order to invest, rather than its ranking in an index. The company filing refers to investing in stocks both domestic and foreign, of different market capitalisation and alternate style, including growth and value.
“The Adviser [Fidelity] is not constrained by any particular investment style,” it read.
Fidelity was a go-to shop for active funds until the dotcom crash of the millennium, but has since lost market share to passive trackers. In 2015, almost three quarters of asset inflows – 72% – went into index-tracking passive funds, while 28% went into active funds, found a survey from Casey Quirk by Deloitte.
The new and innovative fusion of an ETF’s structure and tax efficiency along with an actively managed, closed-end vehicle aims to boost the fund’s liquidity, Fidelity said in the filing, and will address the tendency of closed-end funds to trade at a discount to their net asset value.
The ETF will publish a daily “tracking basket” in order to calculate the intraday net asset value and will offer shareholders the option of selling their shares at NAV every week if they want to avoid selling them on the stock exchange. In a closed-end fund, investors would have to sell shares over the counter at a price determined by the market if they wanted to bypass the secondary market.
Dave Nadig, director of ETF research at FactSet, wrote in a blog that he was not convinced this process would help the discount problem – it would merely allow institutional investors to skip the trading floor and liquidate their position at fair value.
“Normally, discounts are collapsed when an investor buys ETFs in the open market (increasing upward price pressure) and arbitrages that out by selling underlying securities (increasing downward NAV pressure),” he wrote.
“In this case, the investor’s desire to get out is met, but only half of the seesaw hits the market (downward pressure as the fund is forced to sell holdings to meet the redemption claim).”
There is only one other non-transparent ETAF on the US market, called “NextShares” from Eaton Vance, which launched in February 2016 after it got approval from the US regulator in 2014.
Other models like from Precidian Investments have yet to receive the green light from the SEC.
Apart from waiting for approval from the SEC, it will take time to win backers for the fund, Fidelity said in a statement to Reuters. (The Eaton Vance Stock NextShares (US: EVSTC) has just $14m in assets and costs 0.65%.)
However, the market is growing. Actively managed ETFs and ETPs listed globally saw assets under management hit a record high of $38.2bn at the end of June, according to ETF research consultancy ETFGI.