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

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

    Background Image

    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!


    The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

    This information is intended for US residents only.

    What are the Risks?

    All investments involve risks, including possible loss of principal. Generally, those offering potential for higher returns are accompanied by a higher degree of risk. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices are affected by interest rate changes. Bond prices, and thus a bond fund's share price, generally move in the opposite direction of interest rates. As the price of bonds in a fund adjusts to a rise in interest rates, the fund's share price may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent the fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Smaller, mid-sized and relatively new or unseasoned companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Historically, these securities have experienced more price volatility than larger company stocks, especially over the short-term. Performance of the funds may vary significantly from the performance of an index, as a result of transactions costs, expenses and other factors. For smart beta ETFs, there can be no assurance that a fund's multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. For actively managed ETFs, there is no guarantee that the manager's investment decisions will produce the desired results. These and other risks are discussed in the fund’s prospectus.

    ETFs trade like stocks, fluctuate in market value and may trade at prices above or below their net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price, not their Net Asset Value (NAV), on the exchange on which they are listed. Shares of ETFs are tradable on secondary markets and may trade either at a premium or a discount to their NAV on the secondary market.

    For more information on any of our funds, contact your financial advisor, download a free prospectus or call us at (800) DIAL BEN/342-5236. Investors should carefully consider a fund's investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.