ETF Trends
ETF Trends

While the disclosure rules for actively managed exchange traded funds (ETFs) might benefit the investor who still craves transparency, the rules could inadvertently hurt small-company stocks.

The Securities and Exchange Commission (SEC) rules mandate that active ETFs must disclose their holdings each day, while mutual funds typically only make those disclosures once a month or even once a quarter.

The rules could wind up hurting smaller companies. Unlike the large- and mid-caps, who often see huge trading volume every day, the situation is a bit different for smaller companies. Their shares trade relatively rarely, making it a challenge for large funds to buy big stakes without causing a spike in market demand, which pushes up prices, reports Ian Salisbury for the Wall Street Journal.

As a result, active ETFs have so far stuck to primarily large-caps and short-term bonds. And those small-caps have been one area where active managers have found the most bargains, helping them beat index funds.

If you’re looking for some small-caps with your active management, PowerShares does offer a fund with some small-company holdings: PowerShares Active Alpha Multi-Cap Fund (PQZ). They’re 17% of the fund. If you want more than that, patience is a virtue.

As managers get used to the concept of active ETFs, perhaps we’ll see some funds focused exclusively on the small-caps.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.