ETF Capital Markets Desk: Non-transparent Active ETFs—Coming Soon?

Too soon to give up on the intraday Indicative net asset value (iNAV).

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David MannHead of Global ETF Capital Markets,Franklin Templeton Investments

After a long wait, it looks like non-transparent active Exchange Traded Funds (ETFs) could soon be on the investment menu. David Mann, our Head of Global ETF Capital Markets, talks through the proposed new structure—and how the trading concepts of today will still be applicable in the structures of tomorrow.

There was some major news in the ETF world with the recent Securities and Exchange announcement that we might see non-transparent active ETFs available sometime soon.

The proposed rule will be limited to funds that hold US-listed securities. Furthermore, to give investors comfort that the ETF will trade in line with the value of its underlying basket of securities, there will be a requirement to disseminate the value of the basket every second (called the VIIV or Verified Intraday Indicative Value). We tried to warn you that it was too soon to give up on INAV!!

Obviously, seeing the value of the underlying basket (via the VIIV) will give market makers some level of comfort on where they should quote the ETF since they will not know the underlying basket.

As a reminder, as I have discussed on this blog several times already, in order to trade an ETF effectively, market makers need to know either 1) the price of the underlying basket or 2) the price of other correlated instruments. Given that that they will not be able to calculate option one (even though it is calculated for them), one would expect them to utilize option two.

Trading in these non-transparent funds should be somewhat similar to how market makers trade ETFs that hold international equities today. We talked about the concept of using correlated instruments to obtain an ETF “fair value” here.

Has it really been two years since I discussed (transparent) active ETFs in the market and how the non-transparent structures were only just proposals? I guess I will have to update this post at a later date!