Capital Markets
Portfolio transparency, manifested by publication prior to each trading day of the Creation Basket securities (a.k.a. portfolio composition file or PCF), is a cornerstone for the success of index-based and active ETFs.
Why? Because through the published Creation Basket, market makers and authorized participants (APs) know directly in real time what stock specific risks they are exposed to when they post a bid/offer price, when they hedge, when they undertake arbitrage and when they create and redeem with the ETF advisor. Portfolio transparency undeniably translates into efficient and liquid markets, with accurate pricing and tight spreads in all market conditions.
So while assessment of portfolio transparency might be seen as counterintuitive when considering the recent SEC-approved ETF wrappers that the financial press has termed 'non-transparent', Blue Tractor's position is that it's actually imperative to focus on the daily Creation Basket transparency for each of the wrapper structures in order to understand the inherent risk each one carries.
Case in point - one of the recently approved non-transparent ETF wrappers doesn't even publish a Creation Basket. And the others non-transparent wrappers employ 'proxy portfolio' Creation Baskets constructed using latent, substitute securities that attempt to mimic the return characteristics of the undisclosed, actual portfolio. With these non-transparent wrappers a market maker cannot identify with certainty which securities in the published basket are in, or are absent, the undisclosed ETF portfolio. This will heighten market maker risk, especially in high volatility markets or when ETF portfolios consist of less liquid securities, leading to wider spreads and less efficient markets.
It really boils down to a simple test - if one cannot state with certainty that the securities observed in the basket are in the actual ETF portfolio than the wrapper must be non-transparent. And if no basket is even published than the wrapper is undeniably non-transparent.
Contrast these with the Creation Basket in Blue Tractor's Shielded Alpha℠ ETF wrapper. The Blue Tractor Creation Basket is algorithmically constructed using only the actual portfolio names (but not their correct portfolio % weightings), no proxy securities are ever used and there is a guaranteed minimum 90% asset value overlap between the Creation Basket and the undisclosed ETF portfolio. By anyone's definition Shielded Alpha℠ is a highly transparent ETF wrapper (and certainly NOT non-transparent).
As a result of this high level of transparency, with the Shielded Alpha℠ ETF wrapper market makers and APs always know the risks they are exposed, enabling them to hedge appropriately and conduct efficient bona fide arbitrage and make markets with tight spreads, just like they do with a traditional transparent ETF. The high degree of transparency via the Blue Tractor Creation Basket also means they have immediate knowledge of any announced trading halts of securities in the ETF portfolio; no other competing wrapper provides this lens to the capital markets.
And no differently than with a fully transparent actively managed ETF, market makers and APs can generate sub-second, real time intraday pricing for the ETF off of the published Shielded Alpha℠ Creation Basket using last sale or midpoint pricing, or a combination thereof, for highly accurate pricing. They never have to rely on stale 1-second intraday pricing disseminated by a third party calculation agent.
With a Shielded Alpha℠ Creation Basket APs can transact directly with the ETF during creations and redemptions, transacting efficiently in the capital markets as they do best. There's no requirement for third party AP Representative accounts and no need for an ETF to enter into multiple non-disclosure agreements with third party pricing and calculation agents.
Why? Because through the published Creation Basket, market makers and authorized participants (APs) know directly in real time what stock specific risks they are exposed to when they post a bid/offer price, when they hedge, when they undertake arbitrage and when they create and redeem with the ETF advisor. Portfolio transparency undeniably translates into efficient and liquid markets, with accurate pricing and tight spreads in all market conditions.
So while assessment of portfolio transparency might be seen as counterintuitive when considering the recent SEC-approved ETF wrappers that the financial press has termed 'non-transparent', Blue Tractor's position is that it's actually imperative to focus on the daily Creation Basket transparency for each of the wrapper structures in order to understand the inherent risk each one carries.
Case in point - one of the recently approved non-transparent ETF wrappers doesn't even publish a Creation Basket. And the others non-transparent wrappers employ 'proxy portfolio' Creation Baskets constructed using latent, substitute securities that attempt to mimic the return characteristics of the undisclosed, actual portfolio. With these non-transparent wrappers a market maker cannot identify with certainty which securities in the published basket are in, or are absent, the undisclosed ETF portfolio. This will heighten market maker risk, especially in high volatility markets or when ETF portfolios consist of less liquid securities, leading to wider spreads and less efficient markets.
It really boils down to a simple test - if one cannot state with certainty that the securities observed in the basket are in the actual ETF portfolio than the wrapper must be non-transparent. And if no basket is even published than the wrapper is undeniably non-transparent.
Contrast these with the Creation Basket in Blue Tractor's Shielded Alpha℠ ETF wrapper. The Blue Tractor Creation Basket is algorithmically constructed using only the actual portfolio names (but not their correct portfolio % weightings), no proxy securities are ever used and there is a guaranteed minimum 90% asset value overlap between the Creation Basket and the undisclosed ETF portfolio. By anyone's definition Shielded Alpha℠ is a highly transparent ETF wrapper (and certainly NOT non-transparent).
As a result of this high level of transparency, with the Shielded Alpha℠ ETF wrapper market makers and APs always know the risks they are exposed, enabling them to hedge appropriately and conduct efficient bona fide arbitrage and make markets with tight spreads, just like they do with a traditional transparent ETF. The high degree of transparency via the Blue Tractor Creation Basket also means they have immediate knowledge of any announced trading halts of securities in the ETF portfolio; no other competing wrapper provides this lens to the capital markets.
And no differently than with a fully transparent actively managed ETF, market makers and APs can generate sub-second, real time intraday pricing for the ETF off of the published Shielded Alpha℠ Creation Basket using last sale or midpoint pricing, or a combination thereof, for highly accurate pricing. They never have to rely on stale 1-second intraday pricing disseminated by a third party calculation agent.
With a Shielded Alpha℠ Creation Basket APs can transact directly with the ETF during creations and redemptions, transacting efficiently in the capital markets as they do best. There's no requirement for third party AP Representative accounts and no need for an ETF to enter into multiple non-disclosure agreements with third party pricing and calculation agents.