The U.S. Securities and Exchange Commission (SEC) has granted preliminary exemptive relief to asset managers T. Rowe Price, Fidelity and Natixis and turnkey ETF provider Blue Tractor to offer semi-transparent exchange-traded funds.

The U.S. Securities and Exchange Commission has granted preliminary approval for a group of asset managers to proceed with the launch of semi-transparent active ETFs. (Photo © Securities and Exchange Commission)

The relief paves the way for the firms to issue ETFs that employ an actively managed investment approach without being subject to a daily portfolio transparency condition.

The semi-transparent structure, which is an alternative to the daily portfolio disclosure structure required of conventional transparent ETFs, enables an asset manager to deliver an active strategy in an ETF wrapper without disclosing holdings information that could be harmful to the interests of fund shareholders.

ETFs have become a $5 trillion-plus market in recent years with investors drawn to their tax efficiency, low-cost structure, and convenience. However, due to regulatory requirements for daily portfolio transparency, the overwhelming majority of ETFs are based on passive strategies.

Plenty of energy has been expended in an attempt to get non- or semi-transparent ETFs airborne. Indeed, asset managers of all stripes and sizes have been in dialogue with the SEC for several years about the potential launch of such products.

The SEC has progressively softened its stance on non-transparent ETFs in response to asset managers’ efforts to build in safeguards to mitigate regulatory concerns.

NextShares, ActiveShares

Back in 2014 Navigate Fund Solutions, an affiliate of Eaton Vance, won approval for an open-ended ETF-style fund structure called an exchange-traded managed fund, branded ‘NextShares’, that lists on an exchange and trades using a NAV-based trading protocol but does not need to disclose holdings on a daily basis.

A number of blue-chip asset managers – firms such as Amundi Pioneer, Columbia Threadneedle, and Principal – signed licensing deals with Navigate to utilize this proprietary structure, but very few funds have actually made it to market. And of those that have, asset flows have been modest.

Precidian Investments, a minority investment of Legg Mason, has also made inroads into getting active ETFs off the ground. Earlier this year it won approval for its ‘ActiveShares’ structure.

The Precidian approach masks an ETF’s holdings by inserting a blind trust between the fund and its authorized participants (APs). A ‘trusted agent’, specifically a custodian bank, knows the portfolio holdings and uses a confidential account to perform all creations and redemptions on behalf of APs.

IndexIQ, part of New York Life, American Century and GAMCO are among the asset managers to have licensed this intellectual property. As yet, though, no ActiveShares ETFs have come to market.

Others are working on their own approaches, including Invesco which filed an application with the SEC in September requesting exemptive relief to build a proprietary non-transparent active ETF model.

Growing traction

While yesterday’s preliminary approval clears an important hurdle, additional regulatory steps must take place before the asset managers can launch any ETFs. At this point, it is also worth noting that lots of ETF ideas are filed but never make it to market, primarily for commercial reasons. Moreover, being active doesn’t guarantee success.

However, yesterday’s announcements do suggest that momentum is building and a possible wall of active ETFs is edging closer.

Tim Coyne, Head of ETFs at T. Rowe Price, commented, “Passively managed, index-based strategies have fuelled the growth of ETFs thus far. But we believe that semi-transparent, actively managed ETFs from a trusted brand like T. Rowe Price have the potential to gain traction with investors and advisors who are already interested in active management but who might prefer the ETF structure.

“We believe this is a significant milestone that will lead to opening a new avenue for our business.”