Disclosure Remains Greatest Obstacle for Active ETFs
January 21, 2002
In November, the SEC issued a concept release on actively managed ETFs and asked for comments from the industry on the would-be products no later than January 14. In its letter dated January 14, the Investment Company Institute addressed several concerns, specifically its main concern over portfolio holdings disclosure.
The holdings of traditional index-based ETFs are transparent, which allows the market maker to keep the price very close to the fund's NAV and avoid substantial premiums or discounts on the fund. That would not be the case with an actively managed ETF, however, that does not disclose its holdings.
"At this point in time, it is far from clear how this [arbitrage] mechanism could work in the case of an ETF whose portfolio is actively managed," the ICI letter says. "For a variety of reasons, including logistical burdens and increased trading costs associated with disclosing an [active] ETF's portfolio holdings on a real-time basis, it is likely that all or part of the fund's portfolio will not be publicly disclosed. As a result, an actively managed ETF may be unable to maintain a market value that tracks NAV."
One way of getting around this problem would be for an ETF to "selectively disclose its portfolio" to the creation unit holders but not to retail investors, the letter says. However, that would be unfair to retail investors because it allows one group to trade based on that information, but not the other, according to the ICI. The Institute recommends that the SEC only permit ETFs that completely disclose portfolio holdings.
Barclays Global Investors, which submitted its comments to the SEC on January 11, makes virtually the same points in its letter. The main concern at BGI, which offers the iShares series of ETFs, is that the prices at which shareholders buy and sell the ETF will not be the same as the value of the fund's underlying holdings, according to its letter.
"...we are concerned that actively managed products that are not fully transparent will lack the efficient arbitrage mechanisms necessary to reasonably ensure that their shares will trade throughout the day at prices that track NAV," the letter says.