Blue Tractor Group, a New York-based product developer for the ETF industry, has announced that the first semi-transparent active ETF to utilize the firm’s ‘Shielded Alpha’ wrapper is expected to list in Q1 2021.
Terry Norman, Founder, Blue Tractor Group; Craig Urciuoli, Co-Founder & President, Red Gate Advisers.
Similar to other opaque ETF structures, Shielded Alpha ETFs are able to avoid disclosing daily portfolio holdings, thereby immunizing the fund against attempts to front-run or reverse engineer the strategy while maintaining the tax efficiency, liquidity, and lower costs typically associated with ETFs.
The model involves the ETF advisor’s custodial bank uploading the confidential ETF portfolio to the cloud-hosted, secure Shielded Alpha service on a daily basis. A proprietary algorithm then generates an ETF creation basket that holds all the securities of the confidential portfolio but with different weightings.
Market makers and authorized participants may use the Shielded Alpha Creation Basket for sub-second real-time pricing, as their hedge and arbitrage portfolio, and for creation and redemption activity directly with the ETF’s advisor.
Terry Norman, Founder of Blue Tractor Group, said, “Blue Tractor’s Shielded Alpha structure offers an innovative and effective solution for active managers looking to access the numerous benefits of the ETF wrapper while protecting their proprietary investment approaches.”
The fund
The first ETF to harness the Shielded Alpha wrapper is expected to be the Stance Equity ESG Large Cap Core ETF which will be launched by Red Gate Advisers, a Pennsylvania-based multi-boutique investment advisor. It will be managed by Stance Capital, a Boston-based registered investment advisor specializing in quantitative ESG asset management and research.
The ETF will provide exposure to a socially responsible portfolio of US large-cap equities. Companies engaged in weapons, tobacco, or thermal coal will be ineligible for selection.
The fund will seek to identify companies that successfully manage sustainability‐related key performance indicators (KPIs) such as energy productivity, carbon intensity, water dependence, and waste profile. Additional KPIs relating to governance include the capacity to innovate, unfunded pension fund liabilities, the difference between CEO and worker pay packets, safety performance, employee turnover, leadership diversity, and percentage taxes paid.
From this ESG-screened pool, the ETF will select companies with exposure to fundamental risk factors that are expected to generate alpha. The factors will compete for inclusion on an annual basis and will be adjusted based on accumulated learning.
The fund’s expense ratio has yet to be disclosed.
Craig Urciuoli, Co-Founder and President of Red Gate Advisers, said, “We are excited to partner with Blue Tractor and bring desirable strategies to investors. The Blue Tractor Shielded Alpha wrapper offers the ability to access skilled managers, such as Stance Capital, who were previously hesitant to manage ETFs which are superior shareholder-friendly vehicles.”