Invesco develops proprietary non-transparent ETF model

Sep 27th, 2019 | By | Category: ETF and Index News

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Invesco has filed an application with the US Securities and Exchange Commission (SEC) requesting exemptive relief to build its own non-transparent active ETF model.

Invesco develops proprietary non-transparent ETF model

Invesco has filed an application for exemptive relief to build its own non-transparent active ETF model.

While most passive and active ETFs today require daily portfolio disclosure, which exposes active managers’ investment ideas to other investors, the Invesco model, if approved, would maintain the confidentiality of a fund’s strategy and help mitigate the risk of front-running by keeping a portion of holdings confidential.

It will, however, retain many characteristics that investors find attractive in an ETF wrapper, including an effective arbitrage mechanism and intraday tradability.

This will be achieved through the use of a theoretical proxy portfolio that is highly correlated with the ETF’s actual holdings. Authorized participants would use this proxy portfolio for the creation/redemption mechanism, while Invesco affiliated broker-dealers would assist the process by executing trades to realign the basket to the ETF’s holdings.

Invesco’s non-transparent active ETFs will strike at least two NAVs per day, thus providing multiple creation and redemption windows to authorized participants throughout the day.

Dan Draper, Managing Director and Global Head of Invesco ETFs, commented, “Invesco is excited to have filed with regulators for our own innovative and proprietary non-transparent ETF model. We believe that the structure of our model will provide investors with the ability to maximize the benefits of active management through a tax-efficient and liquid ETF wrapper.”

Invesco is not the first to float the idea of a non-transparent active ETF structure. Fidelity Investments, T. Rowe Price Group, New York Stock Exchange, and Blue Tractor Group have all filed applications for their own design, while Precidian Investments, a minority investment of Legg Mason, became the first to taste success with the firm’s ‘ActiveShares’ structure gaining approval from the SEC in April.

The creation of non-transparent active ETFs is expected to provide investors with several benefits including lower costs, greater efficiency, and a more diverse ETF market.

Draper added, “One of the key priorities of Invesco ETFs is offering investors a variety of choice. We believe that our model has the potential to increase the number and range of active ETFs available to investors, which may have been limited in the past by concerns of front-running. By introducing a possible solution to non-transparent active ETFs, Invesco believes that there may be a way for both passive fully transparent ETFs and active non-transparent ETFs to be valuable tools in an investor portfolio.”

Investors appear broadly to be open to the idea. According to a study by financial data and analytics provider Broadridge Financial Solutions which surveyed 200 advisors with at least $10 million in assets under management, 85% of respondents stated an interest in the concept of non-transparent active ETFs, while 83% said they hoped to see their favourite active mutual funds become available in the new format.

However, the research also found that most advisors are reluctant to jump straight into active non-transparent ETFs with their top concern being that these products are too new and untested in the market. Less than a quarter (22%) of advisors said they would use non-transparent ETFs within 12 months. But 64% said they would do so after one year.

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