Transparency, one of the key attractions of exchange-traded funds, is being challenged by several big asset managers including JPMorgan, which announced on Sunday its intent to license a patent for an ETF structure that does not disclose holdings on a daily basis.
The model structure, known as ActiveShares, was developed by Precidian, which is seeking approval for its use from the Securities and Exchange Commission. JPMorgan has signed a letter of intent to negotiate a license for ActiveShares.
“Advisors want and use multiple types of investment vehicles to suit different client portfolios, and we are looking forward to helping meet those needs,” said Bob Deutsch, head of ETFs for J.P. Morgan Asset Management. ”It will be no less transparent than a traditional mutual fund, and there won’t be the risk of front-running or reverse engineering.”
Those are key concerns of financial firms wanting to introduce active equity ETFs. They do not want to disclose throughout the trading day the exact components of their portfolio for fear of losing a competitive edge.
At this week’s Inside ETFs conference in Hollywood, Florida, Nigel Bradshaw, Global ETF leader at PwC, said SEC approval of models for nontransparent ETFs could be a “game changer” for the future of ETFs, “opening up a whole new market for the industry.”
A PwC report released in July said the approval of nontransparent ETFs is the most important development over the next five years.
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Doug Yones, head of exchange-traded products at the NYSE, which has filed a request with SEC for a new rule that would permit the listing of nontransparent ETFs on its Arca trading platform, also said at the Inside ETFs conference that he expects to see more trading of nontransparent ETFs.
To date, the SEC has not approved Precidian’s filing, which has been revised at least a couple of times, but in December 2015 it did approve a related product, Eaton Vance NextShares, which trade throughout the day but price only after the close and disclose their holdings quarterly, as mutual funds do.
“The Commission preliminarily believes that it is not in the public interest or consistent with the protection of investors or the purposes fairly intended by the policy and provisions of the [Investment Advisers Act of 1940] to grant the exemptive relief under section 6(c) that the applicants seek,” the SEC ruling said.
In June 2016 Precidian wrote the SEC that non-transparent ETFs are the best option for active managers to defend against iShares, Vanguard, State Street, PowerShares, Wisdom Tree and the rest of the ETF market, referring to the big sponsors of passive ETFs.
Bradshaw expects growth in ETFs will continue to accelerate, adding another $1 trillion in assets by early 2018 for a total of $3.6 trillion in assets because ETFs are simply “a better mousetrap” — low cost, tax efficient and, for the most part, transparent.
He expects most of the growth in ETFs will continue to come from passive funds and smart beta strategies, though $2.6 billion in active strategies — a “tiny amount” — could also grow if nontransparent ETFs are approved for market.
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