Will active management be adopted in the ETF wrapper?
How are these models different from ActiveShares™ and existing active ETFs today?
To mask daily transparency while facilitating price discovery, semi-transparent ETFs are going to rely on a proxy basket that represents the ETFs’ holdings. Using a proxy basket, the models are believed to provide enough transparency to allow liquidity participants such as Authorized Participants and Market Makers the ability to create markets, manage their exposure and at the same time alleviate concerns by portfolio managers of reverse engineering the investment strategy which can lead to front-running.
Proxy based or semi-transparent models will only be allowed to hold U.S. listed equity securities, American Depository Receipts (ADR), or non U.S. listed common stocks that trade contemporaneously with the U.S.2 BNY Mellon has been working closely with the industry to refine these operating models in heading towards final approval. To assist our colleagues within the asset management industry in their decision making process, below is a comparison chart of the models highlighting both differences and similarities. With a full suite of services available to ETF issuers, BNY Mellon is prepared to help investment managers navigate these new models in order to best determine what makes sense based on their investment strategies.
1 ETFGI.com; October 2019 Market Landscape
2 Common stock must trade in the same time period as the U.S. equity market
3 BNY Mellon internal research, November 2019
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