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The decision in March 2008 by the Securities and Exchange Commission to approve the listing of Active Exchange Traded Funds (active ETFs) in the U.S. market opened up a new form of asset management. Exchangetraded funds' are considered a passive investment solution that combines the dynamics of index-tracking unit trusts with the merits and tradability of listed investment companies. Its structure surpasses the major demerits of the aforementioned two vehicles given lower operating expenses, trading liquidity, and more efficient tax structures than the conventional index-tracking mutual funds. The launch of the active ETFs faces the challenge to maintain those distinctive properties and let investors gain access to actively managed portfolios. Nevertheless, the unique merit of full transparency of a passive ETF becomes the main drawback of the new investment structure due to the obligation of mandatory disclosure of the constituent holdings in addition to any re-balancing in real time.2
Full transparency means the daily disclosure of the entire portfolio and presents the problem of "front running," since the disclosure in real time of the portfolio allocation could lead investors to replicate the allocation more promptly than the fund. As a result, fund managers in the real world are reluctant to disclose their allocations in real time. On the other hand, incomplete knowledge of the constituents of the underlying portfolio violates the process of proper trading and could lead the market maker to be misinformed and, consequently, fail to provide a "fair" price to the investors1. Gastineau [2001] proposed the creation of a hedged portfolio as a proxy with identical risk profile, so the market makers, specialists, investors, and arbitrageurs can be aware of risk exposure. The success of the new active structure depends on the ability to overcome the aforementioned obstruction.
There is a lack of related empirical evidence on the relative performance of active ETFs. Rompotis [2009, 2010] examined the performance and the bid-ask spread of the first four active ETFs. On the contrary, there is extended literature based on passive ETFs, such as the ability to mimic the index (Gastineau [2004]; Frino et al. [2004]; Elton et al. [2002]), the correlation between NAV and trading prices (Cherry [2004]; Delcoure and Zhong [2007]; Tse and Martinez [2007]) and the existence of tax efficiency...