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Portfolio > ETFs

SEC Approves More Nontransparent ETF Strategies

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Get ready for a possible flood of actively managed U.S. equity ETFs that don’t disclose their actual holdings on a daily basis, as most ETFs do.

The Securities and Exchange Commission on Thursday gave preliminary approval of applications for such ETF strategies, referred to as nontransparent or semi-transparent strategies, from T. Rowe Price, Fidelity, Natixis and Blue Tractor. The first three asset managers would come to market with their own funds. Blue Tractor would license its strategy to asset managers, much like Precidian has done with its nontransparent ActiveShares ETF strategy, now licensed by more than 10 financial firms.

The asset managers still have to file registrations with the SEC for the specific ETFs that would use these strategies and the exchanges where the ETFs also have to file for SEC approval.

Scott Livingston, head of global ETF product at T. Rowe Price, called the latest SEC action a “significant milestone” for the firm, noting that there will be more regulatory filings to follow a final notice from the SEC for its semi-transparent actively managed ETF. T. Rowe has not determined yet which investment strategy will be available in the nonconventional ETF structure.

“This is certainly good news for the overall ETF industry and even better news for asset managers themselves who have made these filings and for smaller asset management that may want to partner with an infrastructure provider that will support nontransparent ETFs,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA, an independent research firm.

He expects a nontransparent ETF using Precidian’s ActiveShares strategy will come to market in early 2020, followed by more such ETFs later in the year, including those from firms whose strategies just received SEC preliminary approval. “It takes months to be able to get an actual ETF A launched,” Rosenbluth explained. “It takes time to build up distribution and prepare for launch.”

American Century, which has licensed Precidian’s ActiveShares strategy, hopes to launch a growth and a value nontransparent ETF trading on the Cboe in the first quarter of next year following SEC approval of the Cboe’s filing, which is pending, said Edward Rosenberg, head of ETFs.

Natixis hopes to introduce its first active nontransparent ETF in the second half of 2020 pending further regulatory approvals, according to Nick Elward, head of product and ETFs at Natixis Investment Managers. Fidelity and T. Rowe Price did not provide any timelines.

Ryan Sullivan, senior vice president with the ETF servicing team at Brown Brothers Harriman, a global custodian for mutual funds and ETFs, said these new types of ETFs highlight the “great evolution” that is taking place in the ETF marketplace, from predominately passive funds to the inclusion of actively managed vehicles that will be as tax efficient as passive ETFs and likely cost less than a similar actively managed mutual fund.

Whether these new structures will cannibalize existing mutual funds or complement them with something different is open to question, according to Sullivan.

Even a cloned strategy, however, would differ from its mutual fund counterpart if the fund holds foreign stocks. The SEC’s preliminary approval of the nontransparent strategies requires that the underlying holdings of the ETF trade contemporaneously with the ETF.

Disclosures of holdings, however, could be the same as a comparable mutual fund from the same company. Unlike traditional ETFs, which disclose their holdings daily, mutual funds don’t have to disclose their assets more frequently than quarterly with a 60-day lag. Some provide holdings disclosure monthly or with a smaller lag after the quarter ends.

In T. Rowe’s case, the disclosure will be the same, quarterly with a 15-day lag, like its actively managed mutual funds, said Livingston.

After the market closed on Friday, SEC Commissioners Robert Jackson and Allison Herren Lee, who had voted along with other commissioners to approve the latest nontransparent ETF filings, issued a statement that meant for other asset managers that will be filing registration applications for nontransparent ETFs.

They noted a “core concern: … that, in times of stress, ordinary investors won’t be able to get a fair price for their shares in the funds. For that reason, applications that do not address the potentially serious liquidity problems arising from the fundamental structure of nontransparent ETFS should give the Commission great pause.”

The commissioners noted that the nontransparent ETF strategies they just approved address this concerns in several ways, including giving authorized participants that create and redeem ETF shares access to proxy portfolios with enough information to keep the price of such an ETF in line with its asset value. Still they “wonder” if additional disclosure of risks and enhanced board oversight will be needed. 

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