Exchange traded funds are known for their liquidity, low costs, tax efficiency and transparency. T. Rowe Price is looking into the space and seems to like everything ETFs have to offer, except the transparency part.
Although several traditional mutual-fund managers are working on non-transparent active ETFs, it’s not at all clear whether the SEC will allow these products to launch. ETFs need “exemptive relief” from regulators before they begin trading.
T. Rowe Price is seeking regulatory approval with the SEC to launch actively managed ETFs that do not disclose portfolio holdings daily, reports Jackie Noblett for Ignites.
“For a firm as large and ‘traditional’ as T. Rowe to stand behind the movement for non-transparent, actively managed ETFs is a big deal, to be sure,” Robert Goldsborough, ETF analyst at Morningstar, said in the article.
For fund firms, the allure of non-transparent ETFs is that the portfolio managers would be able to keep their trades a better secret. The theory is this would prevent front-running. But again, these non-transparent ETFs need to pass muster at the SEC, and that could be extremely tricky. Even getting plain-vanilla index ETFs through the regulatory approval process involves a lot of time and legal fees.
Eaton Vance also filed for exemptive relief to offer a non-transparent active exchange traded product called the exchange traded managed fund, or ETMF. BlackRock, State Street Global Advisors and Vanguard also have plans for non-transparent active ETFs. [Eaton Vance’s New ETF Structure Could be a Game Changer]
Daily transparency helps ETF market makers create or redeem ETF shares for baskets of underlying securities. T. Rowe believes its new non-transparent structure could compensate market makers through a “high-quality pricing signal” and “high-quality hedging vehicle” to properly arbitrage the products.
T. Rowe could craft two active ETFs based on its Capital Opportunities Fund and Blue Chip Growth Fund, but the filing would allow the firm to launch others as well.