The backer of a first-of-its-kind ETF that would not disclose how its managers are invested sent a new proposal to regulators on Tuesday, accelerating a race that could allow active managers to strike back at the fast-growing index fund market.
Undeterred by multiple setbacks with regulators, proposal sponsor Precidian Investments filed a request with the Securities and Exchange Commission that would allow it to develop an exchange-traded-fund structure called ActiveShares and license the new product type to top active managers.
Unlike products currently on the market, the funds would not be required to disclose the stocks and bonds that they hold, a boon to managers that look to keep their investment strategies secret.
Precidian's efforts have been supported by BlackRock, State Street Corp. and American Funds-owner Capital Group.
The commission is also evaluating competing proposals for non-transparent active ETFs by T. Rowe Price Group Inc. and Fidelity Investments.
“We've been exceedingly responsive to the questions placed before us by the SEC,” said Precidian chief executive Daniel J. McCabe. “This is important to the markets, because active managers deserve the same type of ability and access to technology that have enabled the index managers to flourish over the last 20 years.”
Last year, regulators gave an initial nod to a proposal for a mutual fund-ETF hybrid by competitor Eaton Vance Corp. They hope that their product,
NextShares, will displace mutual funds, delivering stronger investment results for clients because of the funds' novel structure. But for that product to become a reality, it needs to win favor both with active managers and broker-dealers, potentially a tall order.
Top asset managers have been slow to embrace the structure, with some expressing doubts about the usefulness and viability of actively managed ETFs in general. Most of the growth in the ETF industry — formerly a backwater, ETFs now manage $3 trillion-plus globally — has been in index-tracking funds used by many fee-based advisers looking to lower the costs of exposure to the market. Funds with managers who actively choose stocks and bonds have remained a sliver of the ETF business.
Last month, Eaton Vance chairman and chief executive Thomas E. Faust Jr.
said ActiveShares faced a tough task to earn the approvals it will need to make it to market.
“The analogy that we sometimes hear is VHS vs. Betamax,” he said, describing the race between Eaton Vance's NextShares-promoting subsidiary and other proposals.
The SEC has issued at least two tough evaluations of Precidian's proposal, including one released by Eaton Vance after it obtained the letter due to a request under the U.S. Freedom of Information Act, a public records law.
In that letter, dated April 17, regulatory staff said the proposal raised more questions about the viability of the “non-transparent” investment vehicle than it answered. The regulator has grappled with the complexity of how the proposal maintains intraday trading while hiding its holdings in a blind trust.
But backers of ActiveShares think that structure will yield greater benefits for investors than NextShares, including the ability to trade those funds throughout the day at their market price. That said, first thing's first: To achieve its potential, Precidian's proposed structure will have to get the SEC's stamp of approval.
