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Legg Mason kicks off opaque active ETF trend, under Precidian model

Legg Mason affiliate ClearBridge is listing a new opaque actively managed ETF thanks to a new greenlight from the SEC. The ClearBridge Focus Value ETF (CFCV) will use the opaque active ETF structure – called “ActiveShares” – licensed by Precidian. (Legg Mason owns a 75% stake in Precidian).

The fund is very much in the traditional active mould – it doesn’t really say what it’s buying or why, other than it takes a bottom up approach and looks for value buys.

Under the new SEC rules, the fund can only buy securities that are listed on US exchanges and trade at the same time as the fund’s shares. The fund will disclose its portfolio once a quarter and use only one authorised participant.

The fund charges 0.50%.

Analysis – opaque active ETFs are the future

There’s two quick things that need to be said about this listing:

One, “semi-transparent” is a term of propaganda. Quarterly disclosures are what’s required of hedge funds (13Fs) and what’s required of every public company (10Ks) in the United States. It’s the minimum allowable under America’s disclosure-based regulatory regime. Yet no-one calls Apple’s balance sheet or Renaissance Technologies portfolio “semi-transparent”.

Two, these funds are the future. One thing Bernie and I have both noticed the past twelve months is that there has been a huge uptick in the number of active ETFs getting listed. (And a big downtick in the number of index trackers getting up). In the listing data we’ve looked at, in the past twelve months in the US active ETF launches have gone virtually toe-to-toe with index trackers.

The reason is obvious: share prices. Since Invesco, BlackRock, State Street got rolled by Fidelity’s zero fee index fund, launching passive ETFs doesn’t boost companies share prices anymore. Seeing this, asset managers choose instead to list higher margin active funds. We’re in for a lot more of it.Merlyn.AI sits snug in SNUG

Palo Alto-based index company Merlyn.AI is launching a new fund of funds ETF that uses artificial intelligence to ride bull markets and dodge bear markets. The Merlyn.AI Tactical Growth and Income ETF (SNUG) will invest 30/70 in bonds and equities during bull markets. While investing 100% in gold and bonds during bear markets.

How the fund makes allocation decisions based on trend-following and value sentiment. The investment strategy section of the prospectus stretches three pages. Usually you’re lucky to get three paragraphs.

The fund charges a massive 0.92% fee. But it’s made to look lower thanks to those gimmicky fee waivers that last six months.