Active ETF ball squarely in regulators’ court

Two companies filed this week, seeking funds that don’t report daily

Jan 24, 2014 @ 2:28 pm

By Trevor Hunnicutt

Is 2014 going to be the year the actively managed exchange-traded fund finally takes off?

At this point, the ball may be in the court of securities regulators.

This week, the Securities and Exchange Commission received a pair of requests that could give investors a new way to access the actively managed investment strategies that have been popular for years in the form of a mutual fund.

On Thursday, NYSE Euronext Inc., owner of a major trading hub for ETFs, asked the SEC to allow it to list and trade shares in ETFs that disclose their holdings only quarterly. That request came a day after Precidian Investments filed an application asking to launch several so-called “non-transparent” ETFs under the brand name ActiveShares.

Unlike mutual funds, which report their underlying holdings on a delayed basis, ETFs make those disclosures daily.

Despite the amount of assets that has moved from mutual funds and other investment vehicles to ETFs in the last few years, very few of those funds are set up to allow trading at the discretion of the fund manager. Most ETF managers attempt to passively track a benchmark index.

Some fund managers say that’s because the required transparency has prevented them from bringing actively managed products to market. They say they fear traders, having access to the fund’s holdings, would exploit the transparency and prohibit them from making trades at the best price, a practice known as front-running.

The pair of filings by the exchange and fund sponsor amount to one of the most developed plans to roll out nondisclosed, actively managed ETFs to date, with plans by Precidian to build its fund on top of blind trusts that do not disclose the securities they receive in exchange for shares of the ETF.

Precidian joins several major players with an interest in the space. Eaton Vance, a mutual fund provider that has yet to make inroads in the ETF market, is attempting to bring its own nontransparent fund to market. On Thursday, it said it had filed an updated application for its own version of an ETF that would mimic its mutual funds.

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