The push for actively managed exchange traded funds, the Holy Grail of the ETF industry, is intensifying.
State Street Global Advisors of Boston last Thursday filed an application with the Securities and Exchange Commission for exemptive relief for a series of actively managed ETFs. The move came the same day that PowerShares Capital Management LLC of Wheaton, Ill., said it had become the first company to gain exemptive relief from the SEC for four actively managed ETFs already in registration.
"The active-management application process will accelerate," said Michael Rosella, New York-based chairman of the investment management practice at Paul Hastings Janofsky & Walker LLP in Los Angeles. "There will be a race to bring out new ETFs under this paradigm."
While PowerShares garnered headlines last week, Bear Stearns Cos. Inc. of New York is closer to bringing an actively managed ETF to market. That is because the SEC has already deemed "effective" the final prospectus for The Bear Stearns Current Yield Fund, which will aim to use active strategies to deliver superior yields to the average money-market account, said Matt Hougan, editor of IndexUni verse.com of New York.
That means the fund could be launched any day, he added.
A number of other companies, including WisdomTree Investments Inc. of New York and Barclays Global Investors of San Francisco, also have requests for actively managed ETFs before the SEC.
Actively managed ETFs have been anticipated for years.
Holding up their development, however, have been issues related to transparency. The SEC insists that ETFs provide investors with transparency equivalent to that of stocks. While that isn't an issue for ETFs that follow an index, active managers are leery of telegraphing their moves out of fear that arbitrageurs will jump in front of their trades and wreak havoc on stocks in which they are interested.
SSgA gets around that by proposing actively managed ETFs that invest in other ETFs, as opposed to individual stocks.
"The design of this product is fully transparent; it really addresses that [SEC] concern head-on," said James Ross, senior managing director of SSgA. "I have been very focused on this because we believe [our fund] will be well received in the marketplace because of [its transparency]."
The development of actively managed ETFs also may be pushed along by changes taking place within the SEC.
This week, commission staff members are expected to recommend that commissioners propose a rule to make it easier for providers to launch all kinds of ETFs.
ONEROUS PROCESS
Under current rules, companies that wish to launch an ETF must secure from the SEC an exemption order from several provisions of the Investment Company Act of 1940, including one that requires fund shares to trade at a price based on the net asset value rather than at exchange-negotiated prices.
Once exemptive relief is granted, companies can begin the ETF registration process.
When SEC staff members began discussing the possibility of a rule a few years ago, their focus was primarily on ETFs pegged to equity indexes. Today, however, companies have filed to offer many different kinds of ETFs, including actively managed ETFs.
As a result, the expected rule could cover both passive and active-ly managed ETFs, or at least those actively managed ETFs that promise to divulge their holdings, industry experts said.
The SEC declined to comment on what the proposed rule might look like.
Transparency is key, said one attorney, who asked not to be identified, as he has actively managed ETFs in registration.
The SEC is not concerned with whether an ETF is passive or active, only that its portfolio is transparent, the attorney said.
Whatever the rule looks like, any progress is welcome.
"I think anything to improve the timing [of ETF launches], to bring ETFs to investors, will be well received by ETF sponsors," Mr. Ross said.
APPROVAL PROCESS
A rule making it easier to bring ETFs to market also would level the playing field between established and new ETF providers, industry experts said.
Established providers may have an edge in the approval process because they already may have received exemptive relief for a certain style of ETF, said an attorney, who asked not to be identified. The attorney explained that such providers wouldn't necessarily have to file for exemptive relief each time they wanted to bring out a similar ETF.
That gives established providers a head start over a newer provider who may be filing to offer ETFs for the first time, he said.
"We're faced with the situation now where new market entrants would need several months to bring their ETFs to market, but someone like [Barclays, the provider with the most ETFs outstanding, and the most assets] could launch ETFs in 60 days," the attorney said. "That is one of the reasons why we need a rule."
Jeffrey Feldman, founder and chairman of XShares Group LLC of New York, parent company of XShares Advisors, agrees.
"I think the marketplace is better off if the landscape is level and everyone can compete," he said.
E-mail David Hoffman at [email protected].
