T. Rowe Price Group Inc. appears to be inching closer to launching its first actively managed exchange-traded fund — a fixed-income offering — and experts predict that it will be the first of many of its kind this year.
T. Rowe Price Group Inc. appears to be inching closer to launching its first actively managed exchange-traded fund — a fixed-income offering — and experts predict that it will be the first of many of its kind this year.
The Baltimore-based firm originally filed to launch actively managed ETFs in December 2009. But last Thursday, the firm amended its filing to address comments from the Securities and Exchange Commission as part of the agency's review of the documents, said Heather McDonold, a spokeswoman at T. Rowe. She declined to elaborate.
Until now, actively managed ETFs largely have struggled to take off, with the exception of Pacific Investment Management Co. LLC's Enhanced Short Maturity Fund Ticker:(MINT).
Investors have not yet embraced actively managed ETFs, largely because of their scarcity, said Tom Lydon, a registered investment adviser and president of Global Trends Investments.
“The horse has to come out of the gate first,” he said, noting that some firms' filings to launch ETFs have been with the SEC for two years.
But with the increased overall interest in ETFs — coupled with the full pipeline of filings with the SEC — Mr. Lydon expects that more active ETFs will get approval and hit the market this year.
Another issue tying up the active-ETF space is the SEC's moratorium on approving active ETFs that use derivatives. Last March, the SEC said it was reviewing whether additional investor protections were needed pertaining to the use of derivatives by mutual funds, ETFs and other types of investments. As part of the review, the agency said it wouldn't approve any active ETFs that used derivatives until its examination were complete.
While a number of firms, including T. Rowe, have amended their active-ETF filings to clarify that they won't use derivatives, the SEC examination is causing some providers to hold off on product development.
However, some experts predict that the SEC will clarify its position this year and allow active ETFs to use derivatives. “I think in the end, they will find that derivatives have a place in actively managed ETFs, if managed appropriately,” Mr. Lydon said. “I expect by the end of the second quarter, the SEC will come out with something on this.”
And leading the charge in the active-ETF space will be fixed-income ETFs, said Paul Justice, an analyst with Morningstar Inc. Many firms are reluctant to launch actively managed equity ETFs, because they are concerned about their portfolios' transparency and the possibility of front-running by traders, he said. But those are not issues in the fixed-income space, Mr. Justice added.
Also, given the recent volatility in the fixed-income market, advisers may be more interested in actively managed fixed-income ETFs because they offer flexibility, Mr. Lydon said.
“In the last quarter, we have seen a little bit of the bond bubble we have been hearing about,” Mr. Lydon said. “If there was ever a year that was posed well for actively management in fixed-income ETFs, this would be the year.”
