Transparency Vs. ‘Tyranny Of Benchmarks’

July 07, 2017

Perfect Transparency

"Investors have perfect transparency into their trading costs, because those costs are expressed as pennies above or below the NAV of the fund, which is calculated once a day," said Stephen Clarke, president of NextShares Solutions.

Of course, if NAV is set once a day, rather than discovered intraday, there's no longer any motive—or even ability—for APs to arbitrage.

That's a feature, not a bug, notes Clarke.

"Because market makers use end-of-day NAV, they're not taking on intraday trading risk, so they don't have intraday hedging requirements as they would for an ETF," he explained. "It's simpler, there's less risk and it should result in better pricing for the customer."

Already, eight NextShares ETMFs have come to market, worth a combined $75.1 million. Fifteen firms have licensed the NextShares model, including ALPS, Hartford Funds and UBS Asset Management, which plans to begin offering NextShares on its brokerage platform in the fall.

Other Plans

Other firms have announced their own plans. Blue Tractor's "Shielded Alpha" model would hide the complete ETF portfolio but give APs a similar-enough list of securities to use for hedging and arbitrage. Fidelity, meanwhile, wants to offer an active closed-end fund that would disclose holdings monthly, but only allow redemptions once a week.

Regardless of what cream rises to the top, says PwC’s Donahue, "our expectation is that we'll have one or more of these models approved in the next 12 months."

The question then becomes whether investors will bite. That's no sure bet.

"Anything that lacks transparency makes me very nervous," says Aviance’s Bertelsen. "We would have to look very hard at these products before employing them. Very hard."


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