Precidian Plans Nontransparent Active ETFs
February 08, 2013
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Precidian Investments, a fund industry intellectual property firm that’s also behind the Maxis Nikkei 225 ETF (NYSEArca: NKY), filed regulatory paperwork to gain permission to market nontransparent, actively managed ETFs that’s almost identical to paperwork iShares’ parent BlackRock Inc. filed in the summer of 2011.
Unlike already-live transparent active ETFs, like Bill Gross’ now-$4 billion Pimco Total Return ETF (NYSEArca: BOND), Precidian’s “exemptive relief” petition to the SEC is asking to market ETFs that have periodic portfolio disclosures, such as those the commission requires for mutual funds. It’s also quite unlike plans for nontransparent ETFs the mutual fund company Eaton Vance has in the works.
At the center of Precidian’s and BlackRock’s plans is a blind trust working on behalf of the authorized participant (AP) that would keep disclosure of portfolio holdings under wraps until regulators require it. Existing mutual funds must disclose holdings every three months with a lag, and it appears BlackRock’s plan, if approved by the SEC, would include disclosure requirements similar to those in place for mutual funds.
“While the funds are nontransparent ETFs, Applicants do not believe that the Funds raise any significant new regulatory issues or that the lack of disclosure regarding a Fund’s portfolio holdings on daily basis will in any way make the fund more susceptible to manipulation for the benefit of one group over another,” the filing said in a turn of phrase that was identical to one found in the BlackRock petition in 2011.
However, while the Precidian and BlackRock petitions for relief are clearly quite similar, they aren’t entirely alike. It appears, for example, that a special arbitrage window aimed at keeping the price of such nontransparent active ETFs in line with their net asset values that would open on select occasions would be more or less open all the time in the version contemplated by Precidian.
Day to day, APs for the products would effectively be doing creations and redemptions for cash and hedging the funds based on the fact that they could redeem shares for the exact cash value of the funds’ net asset value (NAV). Creations and redemptions would happen in kind in the blind trust, allowing the fund to enjoy some of the tax efficiencies that transparent ETFs currently enjoy.
Crucially, the blind trust would be able to do what APs at the center of any index-based ETF are able to do as well, such as eliminating higher-cost securities to get rid of imbedded capital gains at the fund level. Such cherry-picking of securities is a key reason ETFs are considered to be more tax efficient than mutual funds.
The Precidian and BlackRock concept goes to the heart of an ongoing pursuit in the money management industry to provide strategies that aim to beat market benchmarks. A big part of that pursuit is a belief among managers that keeping portfolios secret gives them an edge over others in the market.
Without that, they say, anybody can quickly steal their “secret sauce” and undermine their edge.
Officials at New Jersey-based Precidian declined to comment on the filing, a customary response when it comes to conforming to regulatory quiet periods.