What are non-transparent ETFs

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Unlike ordinary exchange-traded funds (ETFs), which disclose their underlying assets daily, non-transparent ETFs are only required to reveal their holdings on a quarterly or monthly cadence. This ability to conceal their assets can help active non-transparent ETF managers to cloak their strategies for longer periods, with the aim of maximizing performance.

To understand some of the advantages these funds may offer investors, it helps to compare them with standard ETFs.

Related: How taxes and fees impact return on investment

Why would you invest in non-transparent ETFs?

For nearly 30 years, ETFs have been a mainstay for big institutional investors as well as individuals thanks to their transparency, tax efficiency and low cost. Today, the ETF industry in the U.S. has over $6.5 trillion in assets under management.

Traditionally, investors have found ETFs an attractive option because of their liquidity, which has made ETFs more transparent than mutual funds. Unlike mutual funds, you can trade ETF shares throughout the day on an exchange, similar to stocks. And the way shares are created and redeemed gives investors more visibility into the funds’ underlying assets compared with mutual funds. This “transparency” has been true of both actively managed ETFs as well as passive ETFs, which track an index such as the S&P 500.

But the fundamental transparency of the ETF “wrapper” or fund structure has been a thorn in the side of some active ETF managers who may prefer less visibility around their holdings for strategic reasons, hence the appeal of non-transparent ETFs to active managers.

Active non-transparent ETFs, also called ANT ETFs, aren’t required to reveal their assets daily, as noted above. Rather, they report a snapshot of what they hold on a monthly or quarterly basis, similar to a mutual fund. In some cases they report the assets they hold, but not how much they hold.

How passive vs. active strategies can impact transparency

If you think about it, the evolution of active non-transparent ETFs makes sense in the larger context of the ETF universe, where passively managed ETFs comprise more than 90% of that market.

Passively managed ETFs offer some of the lowest fees in today’s market, which is one reason they’re typically cheaper to own than mutual funds. The overall tax efficiency of index ETFs also helps to lower investing costs and has contributed to their overall popularity with investors.

ETFs, of course, are also valued for their role in adding diversification to investors’ portfolios, with many ETFs invested in specific sectors (e.g. electric vehicles, pharmaceuticals) or securities (e.g. U.S. Treasuries, corporate bonds).

No matter whether an ETF is invested in a broader equity market or a niche sector, passive ETFs are designed to mirror or track the stocks in a certain index. Thus, the transparency of these funds is part of how they work.

That’s not true of active ETFs, which rely on the oversight of a fund manager to choose the underlying assets (just like an active mutual fund). But because ordinary ETFs require a daily disclosure of the fund’s holdings, this can hamper an active manager’s ability to execute their investment strategies.

When a fund’s assets are disclosed on a daily basis, the market can bid up the price for their holdings. And while in the short term this might be good (the assets could go up), in the long term it could disrupt the fund manager’s strategies. And if other investors try to anticipate the trades that active managers might make, sometimes called front running, that could cause asset prices to fluctuate and potentially impact the ETF’s performance.

The use of proxies in non-transparent ETFs

How might a non-transparent ETF solve this problem?


The way ETFs keep their price in line with their assets is that the sponsor of the ETF trades throughout the day with an “authorized participant.” These authorized participants will create and redeem “baskets” of securities, i.e. the stocks or bonds that the ETF holds, and then trade them to the ETF for shares of the fund, which allows the ETF to stay in line with the price of its underlying stocks.

This process obviously requires a great degree of transparency across the board. So, how does a non-transparent ETF obscure its holdings?

The answer is, by the use of “proxies.” These are baskets of stock that are similar to but not identical to the underlying holdings of the ETF. Thus, non-transparent ETFs are able to occupy a happy middle ground in the ETF world: They enable fund managers to conceal their strategies while keeping the liquidity of pricing that is core to trading ETFs overall.

The history of non-transparent ETFs

For years, the ETF industry was comprised mostly of index ETFs, which helps to explain why the universe of ETFs is primarily passive. But over time, some investment companies began seeking regulatory approval for non-transparent ETFs, also sometimes called semi-transparent ETFs, in order to pursue more active strategies. The approval for these funds and the technology underlying the non-transparent strategy began rolling out in late 2019, and ANT ETFs have seen steady inflows since then.

Though non-transparent ETFs are still a relatively small part of the overall ETF market, this sector is gaining traction and is now approaching $2 billion AUM. This reflects a similar trend among active ETFs, which have also seen more inflows this year.

The Takeaway

Non-transparent ETFs may be a relative newcomer in the multi-trillion-dollar world of ETFs, but they offer an attractive new opportunity for investors who are interested in active investment styles — but still want the cost efficiency and liquidity of an ETF. Non-transparent ETFs also give active fund managers the ability to cloak their strategies, which may aid potential outcomes.

Learn more:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.


SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA /SIPC. SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.


1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).


2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.


3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.


For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.


Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at investsupport@sofi.com. Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.


More from Mediafeed: How to Bitcoin arbitrage

Bitcoin

2021 guide: How to bitcoin arbitrage

While cryptocurrency is new, crypto lending is quite similar to traditional lending. With a cryptocurrency loan, a borrower typically offers up their cryptocurrency as collateral to the lender, who gives them cash or a stablecoin cryptocurrency that’s tied to a traditional currency and charges the borrower interest on the loan.

For most cryptocurrency loans, the lender isn’t a bank but another individual investor. That means an individual can either be a cryptocurrency borrower or lender. 

There are a number of popular lending platforms where people can lend money to cryptocurrency investors, hold their cryptocurrency digital assets as collateral, and create an income stream from the interest payments of the borrowers.

Related: Understanding the different types of cryptocurrency

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The major advantages of crypto-backed loans are the speed and flexibility they offer. A borrower might be able to secure a loan in hours, and pay-back terms have a wide range, whether a borrower is looking to pay back the loan in a few days, for example, or 12 months.

But investors may want to secure a cryptocurrency loan for any number of reasons. They may need cash liquidity without missing out on the potential for growth that is a draw to individuals investing in cryptocurrency.

Long-term crypto investors may be reluctant to liquidate their cryptocurrency digital assets. But at the same time, they may need money for short-term needs, like a business or medical emergency, or what they consider to be an irresistible investment opportunity — maybe even investing in bitcoin. That’s where a cryptocurrency loan can make a lot of sense for some investors.

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The history of cryptocurrency is dotted with disastrous hacks. For that reason and more, security should be foremost in the mind of anyone handing over their cryptocurrency assets as collateral.

Whether borrowing or lending, it’s important to research the security of the lending platform’s custodian and its reputation in the financial markets. Also, it may be worth investigating if there’s an insurance policy against the possibility of the platform being hacked.

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The volatility of cryptocurrencies means that the amount of the digital currency borrowers have to put up as collateral may be many times the amount of actual cash they receive in the loan. That, in effect, multiplies the amount they stand to lose if they should default on the loan.

Defaults can be costly: Many major crypto lending platforms allow lenders to keep roughly 80% of collateral if the borrower defaults.

Other risks borrowers should know about include the wild fluctuations in the value of the cryptocurrency used as collateral. If the value of the collateral goes down, some lenders can make a “margin call,” in which they ask for more collateral to get the total value back up to the original ratio of the loan. 

While a borrower will get that cryptocurrency back when they repay the loan, it can be a highly disruptive financial event, and can come with financial penalties if the borrower doesn’t have the cryptocurrency to meet it.

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Getting a Bitcoin loan or any other cryptocurrency loan is a process that’s rapidly evolving. There are many online platforms that allow borrowers to take out loans against the cryptocurrency they own, with new competitors joining their ranks all the time. 

There are a few centralized platforms that offer the loans directly to cryptocurrency investors. But most crypto loan platforms are decentralized financial (DeFi) platforms. They work by connecting cryptocurrency-investing borrowers with cash lenders.

As investors start researching crypto loan platforms, they may come across a variety of platforms including Nexo , SALT Lending and Blockfi . The interest rates that crypto lending platforms charge can vary widely depending on a variety of factors, including the particular cryptocurrency being used as collateral. 

Rates might be much higher than the average mortgage rate. They can sometimes come close to the double-digit interest rates charged by credit cards. Borrowers typically also have to pay the peer-to-peer platform a commission, along with other fees.

While a borrower may seek out the lowest available rate, there are other reasons to choose a platform. For one thing, it’s important that the platform is reliable with strong financial backing, so that it will still be viable when it comes time to get your collateral back.

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Getting a cryptocurrency loan is fairly straightforward once a borrower has identified a platform.

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A borrower will need to verify both the cryptocurrency collateral for the loan and their own identity and reliability as a borrower. The platform will then assign a “trust score” based on the degree to which the platform can verify both identity and financial history.

Michael Krinke

Borrowers will likely have options depending on the collateral they want to put up and the interest rate they’re willing to pay. Often, if one agrees to a higher interest rate, they won’t have to put up as much cryptocurrency as collateral.

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This stage happens quickly. Borrowers typically start to receive loan offers within a few hours after submitting their application form. Once a borrower accepts the terms of the loan, they get the money instantly.

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An investor who seeks a crypto loan likely believes that their crypto assets will grow in the future. But investing in cryptocurrency comes with risk, just like any other investment.

Plus, there are a unique set of things to know before investing in cryptocurrency. The incredible returns of some currencies have attracted both investors and criminals.

Buying cryptocurrency means sifting through a host of fraudulent schemes that promise dazzling returns. As an entirely digital asset, it’s prone to hacks, and some investors have had their digital currencies stolen.

Many investors don’t want to keep their assets on crypto exchanges to protect against cyberattacks and theft. Those individuals turn to “cold storage” options to securely store their cryptocurrencies, like hardware or paper wallets, which bring the risk of losing those physical keys and those cryptocurrency assets, forever.

Also, many cryptocurrencies flat-out fail. Being cutting-edge technologies, cryptocurrencies carry the risk that they won’t work in real-life scenarios. Competition among thousands of blockchain projects is intense, and regulators around the world have periodically cracked down on the crypto industry.

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Cryptocurrency is a new and complex area of the capital markets with seemingly incredible opportunities. Crypto loans offer an opportunity for quick liquidity, providing one way to stay invested in these markets while freeing up capital for short-term needs.

That said, both cryptocurrency loans and cryptocurrency investing come with their own set of possible pitfalls for investors. Cryptocurrency is a high-risk, high-reward investment and should be treated as such. 

Newer cryptocurrencies may offer higher risks and rewards than more established ones. But blockchain as a whole is growing in use with institutional-level custody services and futures markets joining in the action.

Learn more:

This article
originally appeared on 
SoFi.com and was
syndicated by
MediaFeed.org.

SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA  SIPC  . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
For additional disclosures related to the SoFi Invest platforms described above, please visit www.sofi.com/legal.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA  the SEC  , and the CFPB  . PDF File, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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