The SEC has just given tentative approval for the first nontransparent actively managed ETF strategy, which could potentially upend the fund industry.
The agency approved an application by Precidian Investments to license ActiveShares, an ETF structure that will disclose daily holdings only to an unaffiliated representative of the authorized participants who are key to the creation and redemption mechanism that keeps ETF share prices aligned with their underlying net asset value. ActiveShares will not disclose holdings on a daily basis as traditional ETFs do, but quarterly with a 60-day lag as mutual funds do.
The SEC will grant final approval of the Precidian application unless it orders a hearing, which can be requested on or before May 3.
“Assuming the formal approval comes through, this will open the floodgates for multiple funds to launch that license the Precidian structure,” said Matt Hougan, chairman of Inside ETFs and global head of research at Bitwise Asset Management. “This is yet another nail in the coffin of mutual funds. They had a good run, but their heyday is in the past. ETFs are clearly the future.”
But many firms best known for their mutual funds — some with ETFs too — have already licensed ActiveShares from Precidian and will presumably offer nontransparent ETFs, including Legg Mason, Capital Group, JPMorgan, Nationwide, Gabelli, Columbia, American Century and Nuveen.
“We could soon see ETF versions of successful actively managed equity strategies from these firms,” writes Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “Precidian-based products could be successful in generating assets, though we see risk of cannibalization of some of a firm’s existing mutual fund base.”