New Era Of Active ETFs Set To Begin

March 31, 2020

In a move that could change the shape of the ETF industry, American Century Investments will debut two newly approved actively managed ETFs on Thursday, April 2 that will report holdings differently than current active ETFs. The American Century Focused Dynamic Growth ETF (FDG) and the American Century Focused Large Cap Value ETF (FLV) are the first ETFs of their kind in that they do not reveal their components on a daily basis like the vast majority of other ETFs, but rather on a quarterly basis.  

FDG and FLV come with expense ratios of 0.45% and 0.42%, respectively. Both funds list on Cboe Global Markets,  the parent company of ETF.com.

It has been a long road for the ETF industry to get to this point—roughly a decade—and issuers have been racing to bring their products to market ever since the SEC gave its blessing to a variety of models. FDG and FLV both rely on Precidian’s model.

How It Works

In this model, a representative of a fund’s authorized participant (AP) would act as an intermediary between the AP and the ETF. The AP would give creation/redemption instructions to its representative, and the ETF would confidentially disclose its holdings and securities to the representative, which is subject to a duty of nondisclosure, according to an SEC document.

From there, the AP representative can carry out the transaction on behalf of the AP.

 “We’ve created a hybrid vehicle between a mutual fund and an ETF. You’ll have the same type of intellectual property protection you would have inside of a mutual fund, but you’ll have the efficiencies inherent in ETFs,” said Precidian CEO Dan McCabe in late 2019.

Roughly a dozen firms have licensed this model from Precidian, but American Century is the first to market.

The launch signals the potential for a new era for ETFs. Many traditional active managers have stayed away from the space due to the daily disclosure requirements, which they have found to be too onerous. Many were leery of being forced to reveal their “secret sauce” and potentially face issues such as frontrunning. However, investors could see a wave of more traditional active strategies made possible by nontransparent active models.

Contact Heather Bell at [email protected]

 

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