Active ETFs May Boom After SEC Lifts Derivatives Ban

December 31st at 9:47am by John Spence

The SEC’s recent decision to lift the nearly three-year moratorium on some new exchange traded funds that use derivatives should speed the rise of actively managed ETFs.

In a speech earlier this month, Norm Champ, director of the SEC’s investment management division, said the agency will no longer defer consideration of requests by fund managers to launch active ETFs that invest in derivatives.

The move comes with two conditions. The SEC said the ETF’s board periodically will review and approve the fund’s use of derivatives and how the investment adviser assesses and manages risk with respect to the ETF’s use of derivatives. Also, the regulator wants the ETF’s disclosure of its use of derivatives in its offering documents and periodic reports to be consistent with relevant Commission and staff guidance.

Importantly, the regulator is continuing its policy of not considering inverse and leveraged ETFs that use derivatives. [SEC to Lift Freeze on Active ETFs That Use Derivatives]

The end of the moratorium might encourage some money managers to launch new active ETF strategies, while active ETFs already on the market might start using them in their portfolios, The Wall Street Journal reports.

There are 54 active ETFs with about $10.4 billion in total assets, according to the story.

PIMCO Total Return ETF (NYSEArca: BOND) skippered by Bill Gross is the largest active fund with about $3.9 billion in assets under management. [PIMCO Total Return ETF Hits $3 Billion in Assets]

Full disclosure: Tom Lydon’s clients own BOND.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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