BlackRock Plans Nontransparent Active ETFs

September 01, 2011


A Nontransparent ETF Future?

Boston-based Eaton Vance has said it is planning to market nontransparent ETFs using patents it obtained when it acquired Managed ETFs, a company owned by longtime ETF industry consultant Gary Gastineau.

The Eaton Vance plan centers on the use of trading based on a fund’s end-of-day NAV.

NAV-based trading allows managers of nontransparent funds to trade securities throughout the day at prices determined at or relative to net asset values calculated on that day.

It’s an idea that makes some advisors wonder whether the trading efficiency of ETFs might be compromised if intraday purchases and sales wouldn’t be definitively priced until the end of the session, and Eaton Vance has declined to comment on its plans, saying they are still in development.

The firm obtained exemptive relief from the SEC to market active funds, though the order didn’t stipulate nontransparent funds.

A Different Ball Of Wax

The disclosure requirements described in the BlackRock filing seem to be much closer to currently prevalent disclosure requirements for mutual funds.

That’s significant because a number of industry sources say that the many mutual fund companies that have made tentative steps to begin offering exchange-traded funds might leap head first into the ETF business if they could keep their portfolio disclosures to a minimum, as they do now.

Mutual fund companies are also said to be loath to transition assets from existing funds into cheaper funds. Moreover, much of the mutual fund industry’s success is predicated on a well-oiled distribution machine. That means that assets segueing into ETFs, where distribution infrastructure is relatively minimal, would mean the mutual fund industry would lose contact with many of its end investors.

Regarding creations in the proposed BlackRock structure, the filing said:

“Since Creation Units will be created solely by the deposit of cash and will typically be redeemed by distributing securities of the fund’s portfolio to a blind trust that will liquidate the portfolio securities in accordance with instructions from the authorized participant redeeming shares, neither the adviser nor the fund subadviser will be able to cause an authorized participant to engage in transactions in which the funds could not engage directly or to otherwise use the in-kind process to circumvent applicable restrictions under the Act.”

Also, when ETF shares are liquidated, the AP would receive cash, again, never knowing what made up the ETF shares that the blind trust redeems.

Crucially, the blind trust becomes a part of the creation and redemption mechanism that is at the center of how an ETF functions. Because that doesn’t change, that means tax inefficiencies and cash drag that are the Achilles’ heels of many mutual funds are likely to be neutralized under the proposed structure.

When faced with redemptions, the fund would have two choices of response: It could raise cash at the fund level if it has a loss it wants to lock in for tax reasons, or it could hand out shares in-kind to the blind trust that would then liquidate shares on behalf of the AP.

Planned Funds

Among the equity ETFs BlackRock said in the filing it is contemplating bringing to market under its exemptive relief filing are:


Large Cap Fund



Large Cap Value Fund



Large Cap Growth Fund



Large/Mid Cap Fund



Large/Mid Cap Value Fund



Large/Mid Cap Growth Fund



Large Cap Long-Short Fund



Large Cap Value Long-Short Fund



Large Cap Growth Long-Short Fund



Large/Mid Cap Long-Short Fund


Large/Mid Cap Value Long-Short Fund


Each of the funds will invest—or, for long-short funds, take short positions—primarily in the 1,200 largest U.S. stocks by market capitalization as determined annually by the Frank Russell Company, the filing said.


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