Ultimately, Market Forces Will Decide Where Active ETFs Go

February 21, 2008 at 12:00 pm by Tom Lydon

Since 2001, the Securities and Exchange Commission (SEC) has been considering the actively managed exchange traded fund (ETF).

Slow-forward seven years, and the SEC is now comfortable with the concept. But in the end, the markets will decide if the concept is right, says W. John McGuire for Ignites. The SEC moved forward with these ETFs after determining that transparency is more critical than whether an ETF tracks an index.

Final approval hinges on a public review process, however, and if no hearing is requested by 5:30 p.m. on Feb. 26, actively managed ETFs will likely hit the market.

Each morning, the ETF will disclose its holdings, giving market participants the opportunity to monitor the value of the securities and compare them to the market price of ETF shares. If there’s a difference, market forces will bring the ETF share price back to the net asset value (NAV) of the underlying securities.

What if the SEC decides that an ETF that isn’t transparent is okay? The market would likely say that it’s not okay at all. After all, transparency is one of the most attractive features of an ETF, and if that doesn’t exist, what’s the point?

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