The exchange traded funds industry received big news, though not positive in the eyes of some, when the Securities and Exchange Commission rejected applications for non-transparent actively managed exchange traded funds by Precidian ETFs Trust and Spruce ETF Trust, a unit of BlackRock (NYSE: BLK).
While the SEC’s rulings apply only to BlackRock and Precidian, diving into the filings reveals a murky outlook for other fund companies that have filed for active non-transparent ETFs, including Eaton Vance (NYSE: EV), State Street (NYSE: STT) and T. Rowe Price (NasdaqGS: TROW).
Notably, the SEC said that active non-transparent ETFs would not afford investors a similar economic experience to what they receive with traditional ETF. The Commission also highlighted the potential dangers non-transparent ETFs could face in times of market duress, saying “The lack of portfolio transparency or an adequate substitute for portfolio transparency coupled with a potential deficient back-up mechanism presents a significant risk that the market prices of ETFs may material deviate from the NAV per share of the ETF – particularly in times of market stress when the need for verifiable pricing information becomes more acute.”
“This close tie between market price and NAV per share of the ETF is, according to the SEC, the foundation for why the prices at which retail investors buy and sell ETF shares are similar to the prices at which Authorized Participants are able to buy and redeem shares directly from the ETF at NAV,” said S&P Capital IQ in a new research note.
Fund managers looking to bring non-transparent active ETFs to market have highlighted the issue of front-running
“By not disclosing holdings on a daily basis, the asset manager would protect itself from other investors from fully understanding the strategy and front-running the trades,” said S&P Capital IQ.
The research firm notes that some issuers with a tradition of active management have not shied away from daily disclosure of their actively managed ETFs’ holdings. For example, the Calamos Focus Growth ETF (NASDAQ: CFGE), the first actively managed exchange traded fund from Calamos Investments, is the ETF offshoot of the firm’s Calamos Focus Growth Mutual Fund (CBCAX). Calamos does not shy away from telling CFGE shareholders exactly what stocks the ETF owns. [SEC Deals a Blow to Non-Transparent Active ETFs]
As the company’s web site highlights, CFGE’s holdings are current as of Oct.22, telling investors that CFGE’s largest holdings are Apple (NasdaqGS: AAPL) and Facebook (NasdaqGS: FB).
CFGE is run by the same management team that oversees the ETF’s mutual fund forefather. As S&P Capital IQ notes, Fidelity took a similar approach with its recent launch of three actively managed bond ETFs – the Fidelity Total Bond ETF (NYSEArca: FBND), Fidelity Limited Term Bond ETF (NYSEArca: FLTB) and the Fidelity Corporate Bond ETF (NYSEArca: FCOR). [Fidelity’s Big Active ETF Splash]