Low cost, transparency and accessibility are the dominant themes that have propelled exchange-traded funds to more than $4.3 trillion in assets under management in the U.S. Largely built on broad-based stock and bond indexes, ETFs have myriad uses for investors across the spectrum. This "everyman" quality has attracted buy-and-hold investors, tactical traders, large institutions and, most recently, central banks, to build ETFs into the fabric of their investment process.
But a host of money managers are now pushing back on the established structure, shunning indexes and daily transparency to offer actively managed ETFs that disclose their full holdings less regularly.
Regulators long held that transparency was a critical aspect of ETF efficacy, allowing investors and market makers to make real-time judgments not only on fund price, but also on fund investments. Over the past year, however, the U.S. Securities and Exchange Commission approved five methods for offering actively managed ETFs that reveal their full portfolios only monthly or quarterly, while still attempting to provide the market with enough information to accurately price ETF shares intraday.
On March 31, American Century Investments launched two ETFs using a structure developed by Precidian Investments. Under this structure, the fund publishes a "verified indicative intraday value" every second during market hours. VIIV is based on the basket of securities that the fund will accept or distribute for wholesale creations and redemptions of ETF shares. The basket is fully representative of the fund. Unlike other ETFs, however, the basket itself is not revealed to the market, but only to a representative of authorized participants that exchanges cash and securities with the fund.
Though throwing new acronyms into a field with too many by half, Precidian's structure merges the tax efficiency of traditional ETFs with the proprietary security selection of traditional active management.
The other four methods use a fully disclosed "proxy portfolio" to provide investors and market makers enough information to buy and sell the ETF, while shielding specific moves or actions by the portfolio manager and also preserving some tax benefits. Fidelity Investments launched three ETFs on June 4 using its proxy structure.
With less than three months of trading, the American Century products have already gathered more than $200 million in assets, primarily from a $95 million creation in Focused Dynamic Growth and a $64 million creation in Focused Large Cap Value on June 5, according to ETF.com.
Edward Rosenberg, senior vice president and head of exchange-traded funds for American Century, was not able to reveal the sources of the large flows though did indicate that the funds are seeing "flows from the independent registered investment adviser community that has fully embraced ETFs."
"There's no better way to prove a product than to launch in a volatile market," Mr. Rosenberg said. Indeed, over its short life, Focused Dynamic Growth has handily beat its benchmark Russell 1000 Growth index while Focused Large Cap Value is largely in line with the Russell 1000 Value index, according to XTF.com.
