Multi-basket ETF Structure for Illiquid Asset Management
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Solution Overview
Problem
The existing single-basket structure for exchange-traded funds (ETFs) limits the management of certain asset classes and investment strategies due to liquidity, accessibility, transaction costs, and transparency issues, particularly with less liquid or less accessible assets like municipal bonds and emerging market securities.
Innovation Solution
A multi-basket structure for ETFs is introduced, allowing for separate creation and redemption baskets that differ from the holdings basket, enabling more flexible management and trading of ETFs by allowing different securities for creation and redemption, which can include less liquid or inaccessible assets.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If a single-basket structure is used for ETF creation and redemption, then the structure is simple and easy to manage, but it limits the management of certain asset classes and investment strategies due to liquidity, accessibility, and transaction cost issues
Solution Approach 1:
The patent segments the single basket structure into multiple baskets: a creation basket for acquiring assets and a redemption basket for distributing assets. This segmentation allows the ETF to use different asset sets for different purposes, enabling management of illiquid or inaccessible assets while maintaining operational flexibility.
2Loss of energy
If the same basket is used for both creation and redemption, then the structure is straightforward, but it increases transaction costs and reduces tax efficiency when dealing with less liquid assets
Solution Approach 1:
By separating creation and redemption into different baskets, the patent enables the ETF to acquire illiquid assets through the creation basket while distributing different assets through the redemption basket, thereby avoiding repeated buying and selling of the same illiquid assets and reducing transaction costs.
Solution Approach 2:
The patent changes the composition parameters of the baskets over time, allowing the creation basket to include inaccessible assets that cannot be easily traded, while the redemption basket includes assets that are more liquid and can be efficiently distributed to redeeming shareholders.
3Loss of information
If a single basket represents both holdings and creation/redemption assets, then transparency is maintained, but it limits the ability to include less liquid or inaccessible assets in the portfolio
Solution Approach 1:
The patent segments the basket information into multiple components: the holdings basket showing actual portfolio composition, the creation basket showing assets used for creation, and the redemption basket showing assets used for redemption. This segmentation maintains transparency for each function while enabling inclusion of diverse asset classes.
Data Source
AI summary
An exchange-traded fund (ETF) has a multi-basket structure that allows shares of the ETF to be created using a different basket of assets than the basket of assets required to redeem shares of the ETF. A method for administering a multi-basket ETF comprises providing shares of the ETF to investors in exchange for assets defined in a published creation basket, providing assets defined in a published redemption basket to investors in exchange for shares of the ETF, and publishing a holdings basket that represents the assets held in the ETF. The multi-basket ETF can be used to implement an ETF holding assets that have a relatively low liquidity and/or accessibility. The multi-basket structure also enables financial strategies such as to minimize transaction costs, increase tax efficiency, access less liquid or less accessible markets or securities, and meet regulatory requirements and ETF investment objectives.