Actively managed exchange traded funds (ETFs) came a step closer to reality when the Securities and Exchange Commission recently issued a concept release seeking comments on these types of instruments.
Wall Street’s watchdog wants the securities industry to provide feedback on the following questions: How are these ETFs likely to be structured? How will investors use, and benefit from, actively managed ETFs? Would the exemptive relief that the SEC has granted to index-based ETFs be appropriate for actively managed ones? Are there any new regulatory concerns that might arise in connection with actively managed ETFs?
Comments are due January 14. The concept release is available online at www.sec.gov/rules/concept/ic-25258.htm.
John Baker, a securities lawyer with Stradley, Ronon, Stevens and Young in Washington, says the fact that the SEC is seeking comments “is definitely a step to allowing actively managed ETFs.”
All of the ETFs created thus far have been index funds, and therefore have transparent holdings. But with actively managed ETFs, Baker says, the question becomes, ” ‘how can you have that transparency?’ In this case, transparency is essential for the [actively managed ETF] to work at all.”
Baker says the type of investor most likely to use an actively managed ETF is a short-term trader. He says this type of investor “wants to be invested but also wants an effective exit strategy. And essentially there’s no better exit strategy than owning an ETF because you can sell it anytime. You have to wait for T+3 to get your money, but you can immediately sell. It’s not free to sell it like a mutual fund, but it’s pretty economic, you only have to pay a small fee for the trade.”