After much anticipation and a few false starts, a new kind of semi-transparent actively managed ETF is now available to investors.
American Century has launched the first ETFs to harness Precidian Investments’ ActiveShares structure.
Kansas City-based American Century Investments has launched two new ETFs becoming the first asset manager to harness an innovative new active ETF product structure called ActiveShares.
Created by financial product developers Precidian Investments, ActiveShares ETFs are able to avoid disclosing daily portfolio holdings while maintaining the tax efficiency, liquidity, and lower costs typically associated with ETFs.
The American Century Focused Dynamic Growth ETF (FDG US) and the American Century Focused Large Cap Value ETF (FLV US) have listed on Cboe BZX Exchange and come with expense ratios of 0.45% and 0.42% respectively.
The funds invest in high-conviction portfolios consisting of 30 to 50 US large-cap securities with growth or value characteristics.
“We’re pleased to be the first firm to offer semi-transparent active ETFs to our clients,” said Jonathan Thomas, American Century Investments’ Chief Executive Officer. “Our goal at American Century Investments has long been providing active management solutions that meet their evolving needs.”
Ed Rosenberg, Head of ETFs at American Century Investments, added, “This new type of ETF gives American Century one of the most diverse platforms in the industry and allows us to introduce products with our unique insights.”
Dan McCabe, Chief Executive Officer of Precidian Investments, said, “We are truly appreciative of ACI’s perseverance in making ActiveShares a reality.”
He added, “We are incredibly proud of this structure, which we believe combines the best attributes of active management with the additional flexibilities of an ETF wrapper. ActiveShares should provide a much better experience for both investors and asset managers.”
ActiveShares
While most passive and active ETFs today require daily portfolio disclosure, which exposes active managers’ investment ideas to other investors, the ActiveShares approach masks an ETF’s holdings by inserting a blind trust, known as a ‘confidential account’, between the fund and its authorized participants.
These trusted agents are privy to portfolio holdings and perform creations and redemptions on behalf of authorized participants.
ActiveShares ETFs provide a live verified intraday indicative value (VIIV) every second which is more regular than traditional ETFs which currently publish their NAVs every 15 seconds. Official portfolio holdings need only to be disclosed on a quarterly basis.
Game changer
Analysts believe the semi-transparent model has the potential to significantly change the ETF landscape by leading to a surge in new actively managed products. Several asset management heavyweights including Legg Mason, which owns a 19.9% stake in Precidian, BlackRock, Capital Group, JP Morgan, Nationwide, Gabelli, Columbia, and Nuveen have all signed up to license the ActiveShares structure.
Beyond ActiveShares, the SEC has given the green light to several other semi-transparent ETF structures including designs from Fidelity, T. Rowe Price, Natixis, and Blue Tractor Group. Invesco, the fourth-largest ETF issuer in the US by AUM has also submitted an application with the SEC for its own proprietary non-transparent model.
The roll-out of semi-transparent ETFs may result in another blow being struck to the traditional mutual fund wrapper which has suffered outflows in recent years as investors have switched to lower-cost, passive ETFs.
While the outlook is intriguing, drastic change is not expected to happen overnight. ActiveShares ETFs are currently limited to investing in only US-listed securities, including common stocks, ETFs, ADRs, REITs, Treasuries, and US-listed futures to ensure that the funds, under most circumstances, can continue to provide an accurate VIIV calculation. For fund managers that specialize in the overseas, non-US markets, this model is not viable in its current structure.
Additionally, according to a study by data and analytics provider Broadridge Financial Solutions, while financial advisors find the concept of actively managed, non-transparent ETFs appealing, most report a low level of awareness of the ActiveShares structure while a majority will also wait until the products are thoroughly tested before investing.