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Waiting on the SEC to Approve Non-Transparent Active ETFs


Money managers are coming closer to launching non-transparent actively managed exchange traded funds, with the Securities and Exchange Commission looking over requests from both providers and market exchanges.

The SEC reportedly told providers that it will begin processing applications for nontransparent ETF offerings once exchanges give the okay to list products, writes Robert Goldsborough, fund analyst at Morningstar.

Earlier this year, the New York Stock Exchange’s part company asked the SEC for permission to list non-transparent active ETFs, and Nasdaq’s parent company followed suit a few weeks later, seeking to list and trade Eaton Vance’s proposed products. [NYSE Pushes to List Nontransparent ETFs]

Now, we play the waiting game, with the SEC’s division of markets and trading scrutinizing the requests.

“Given the recent flurry of activity, it’s clear that the providers are taking this process very seriously,” Goldsborough said. “As a result, we would expect to see some ETFs placed into registration almost immediately after the SEC gives the go-ahead to the proposed nontransparent structures.”

Currently, the SEC requires all ETFs, active and passive, to disclose holdings on a daily basis, which has dissuaded some active managers from launching an ETF and revealing their secret sauce to potential front runners.

Consequently, most actively managed ETFs invest in fixed-income securities because it is harder for most investors to mimic the portfolios of over-the-counter bond securities.

More recently, money managers like State Street (STT), BlackRock (BLK), Eaton Vance (EV), T. Rowe Price (TROW) and Precidian Investments have pushed for non-transparent offerings to help protect trade executions on day-to-day active management in an ETF wrapper. [Precidian Provides Blueprint for Nontransparent Active ETF]

“Should one or more of these proposed structures get the go-ahead from the SEC, we anticipate that the active ETF floodgates could open, and far more traditional fund managers may subsequently seek to roll out their strategies in relatively low-cost, tax-efficient ETF wrappers,” Goldsborough added.

The fund managers have proposed two different types of non-transparent active ETFs. One involves a type of blind trust that would act as the vehicle for the ETF’s marekt maker or authorized participant to handle ETF creations and redemptions without disclosing daily holdings.

Alternatively, Eaton Vance has proposed a new type of exchange traded managed funds, or EMTFs, where market makers would buy or sell shares based on the so-called proxy price that represents the fund’s end-of-day net asset value, or “NAV-based” trading. [Eaton Vance Files Amended Application for ETMFs Product]

For more information on the active ETF space, visit our actively managed ETFs category.

Max Chen contributed to this article.

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.