Transparency Vs. ‘Tyranny Of Benchmarks’

July 07, 2017

No Reverse-Engineering

The system preserves the basic gist of the creation/redemption mechanism while concealing the fund's portfolio in a way Precidian says can't be reverse-engineered.

One problem: APs won't know exactly what's in the ETF when they place their order. They'll have to guess, so they can hedge their exposure between the time they order and the end of day, when creations and redemptions are processed.

Precidian plans to address this problem by publishing a "verified intraday indicative value" (VIIV) every second (versus every 15 seconds, as current intraday NAVs currently are). This VIIV would be available to everybody—APs, specialists and retail investors, giving everybody the best possible estimate of fair value all at once.

Precidian declined to go on record for this article, citing concerns it might impact its standing with the SEC. Precidian's filings have been in limbo with the regulatory agency for years.

But that hasn't stopped other firms from betting ActiveShares will soon be approved: J.P. Morgan, for example, announced in early 2017 it planned to license Precidian's model, while American Funds made a similar announcement in 2014. And Precidian has eight of its own ActiveShares ETFs in registration, to be subadvised by Legg Mason.

NAV-Based Trading Gains Steam

Even as Precidian has suffered years of delays, NextShares Solutions, a wholly owned subsidiary of Eaton Vance, has launched its own take on the active exchange-traded product.

Notably, NextShares aren't actually ETFs. They're active exchange-traded managed funds (ETMFs).

NextShares discloses its funds quarterly, like a mutual fund, but trade intraday, like an ETF. The price at which NextShares transactions settle is equal to the fund's next end-of-day NAV, in a system known as "NAV-based trading."

Essentially, when an investor buys or sells NextShares, her trading costs are locked in immediately, but the actual NAV isn't set until after the market closes.


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