ETF that doesn't reveal its assets poised to get SEC OK

Precidian Funds has been waiting four years for the agency's approval

Apr 9, 2019 @ 1:02 pm

By Bloomberg News

An exchange-traded fund that doesn't have to reveal its assets is poised to get the regulator's blessing after a more than four-year wait.

The Securities and Exchange Commission plans to issue an order granting Precidian Funds permission for the new type of ETF, the watchdog said in a notice Monday. Market participants can still request a hearing through May 3, the regulator said; if granted, that could potentially delay or derail the final approval.

The funds also need permission to start trading from another division of the SEC.

The decision is a huge win for stock pickers, who have long pushed back against a requirement that funds publish their investing positions daily. Revealing an active ETF's holdings so regularly may leave it exposed to front-runners seeking to capitalize on predicting its next move. That concern has seen the likes of $1.1 trillion asset manager T. Rowe Price Group Inc. and $1.6 trillion Capital Group Cos. remain on the sidelines of the $3.8 trillion market.

"This is a truly exciting new product that can revolutionize the way that investors approach ETFs," said Thomas Hoops, head of business development for Legg Mason Inc., which has a stake in Precidian and has licensed the new structure.

"We can couple the benefits of the ETF wrapper with active management expertise, while protecting investors and our portfolio managers' intellectual property," Mr. Hoops said in an emailed statement from Precidian.

(More: Actively managed ETFs slow to catch on)

SEC votes

If given the final nod, Precidian will calculate and disseminate the indicative value of its ActiveShares ETFs every second to help the fund's price stay in line with the value of its underlying assets, and will use agents who can see the funds' holdings to help move cash in and out, according to regulatory filings. The company plans to report its funds' holdings once a quarter, like a mutual fund.

Robert Jackson, an SEC commissioner, voted against issuing the notice allowing Precidian's plans to proceed, according to an emailed statement from his office.

"I am not persuaded by the record before me today that the application provides an adequate substitute for the transparency that has been the hallmark of our ETF regime for decades," he said. "If the application is ultimately approved, however, I urge the staff to keep a close eye on this."

Issuer appeal

Other issuers, including BlackRock Inc. and JPMorgan Chase & Co., have already licensed the structure, according to a statement from Precidian. But while asset managers seem interested, some analysts are skeptical about the appeal to investors.

There are already about 270 active ETFs that do reveal their holdings. And Eaton Vance Corp. has so far failed to lure assets to a clutch of nontransparent funds it started in 2016 using a different structure.

"Transparency I would say is in the top five most beloved traits of ETFs — this challenges it," said Eric Balchunas, an ETF analyst at Bloomberg Intelligence. "These are probably going to have a hard time."

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