PIMCO star manager Bill Gross’ bond ETF may have been the biggest exchange-traded story of 2012, having gone from zero to nearly $4 billion in assets under management in a matter of months.
The infant ETF, just 10 months old, is not only asset-rich but novel in another way. It is one of the first and few actively managed ETFs, a tiny segment of the exchange-traded marketplace accounting for less than 1% of the $1.4 trillion in ETF assets.
Indeed, though the number of actively managed ETFs has risen to 53, the PIMCO Total Return ETF (BOND) alone accounts for close to 40% of that segment’s $10.6 billion in assets.
But the removal of a key regulatory barrier that may have limited the growth of actively managed ETFs in the past three years could augur for growth in this corner of the ETF sphere, according to asset management attorney Richard Morris.
In an interview with AdvisorOne, Morris (right) cited the SEC’s lifting of the moratorium on the use of derivatives by actively managed funds that use derivatives as one of the key developments in ETF regulation that could impact the retail level of ETF investors this year.
Announced by the SEC’s director of investment management, Norm Champ, in December, the lifting of the moratorium was accompanied by a “no-action” letter, clearing the way for asset managers to expand in or enter the actively managed ETF space for the first time.
“The likely outcome of the lifting of the ban on the use of derivatives in actively managed ETFs is that we’ll see new types of ETFs entering the marketplace and an expansion of the types of strategies used by ETFs,” Morris says. “The change may prompt asset managers that may have been on the sidelines to enter the market.”
The attorney, a partner of New York-based Morgan, Lewis & Bockius and formerly general counsel of WisdomTree Asset Management, says the move puts ETFs on more of a level playing field with traditional mutual funds with respect to use of derivatives.
“The change does not impact the ETF listing process overseen by the SEC’s Division of Trading and Markets,” Morris adds. “Industry participants are looking for further action to shorten the process used to list active ETFs on exchanges.”
Not only does the lifting of the moratorium on derivatives use level the playing field between ETFs and traditional mutual funds, but it also levels the field between new and early entrants in the actively managed ETF space, Morris says:
“The imposition of the moratorium in 2010 created a regulatory dichotomy. Those sponsors that had already obtained exemptive relief were able to use derivatives.”
While the regulatory change could alter the ETF landscape in 2013, there remains reason for doubt, according to ETFguide.com and AdvisorOne contributor Ron DeLegge.
“The ultimate question is will more active mangers opt in favor of the ETF format,” DeLegge said in an interview. “If I’m an active manager, the ETF format is not something I’m interested in. The fees are brutal; you can charge more in a hedge fund or mutual funds. You also have transparency: I don’t want my daily holdings revealed.”
DeLegge also noted that the 2012 actively managed ETF trend in some ways is less than encouraging.
“You’ve only got one star—Bill Gross,” he says. “The other ones are struggling.”
Check out AdvisorOne’s InsideETFs 2013 enhanced landing page for more ETF-related stories.