The Wall Street Journal-20080205-Actively Traded ETFs- A Step Closer to Reality
Return to: The_Wall_Street_Journal-20080205
Actively Traded ETFs: A Step Closer to Reality
Full Text (512 words)Regulators appear to be on the verge of approving a highly anticipated new type of exchange-traded fund -- a landmark move that stands to shake up the mutual-fund business.
ETFs are a type of mutual fund that trades on an exchange like a stock. They have gained popularity in the past few years because of their trading flexibility and also their low fees. But in terms of structure, ETFs have long been restricted to passively mirroring an index, such as the Standard & Poor's 500-stock index, rather than having a fund manager actively choosing investments.
That's about to change. It opens the possibility that traditional fund companies will face a major threat from aggressive ETF providers. At the same time, it is happening as ETF providers are struggling with a falloff in investor interest in some parts of the once red-hot field.
Friday, the Securities and Exchange Commission issued at notice that gave close-to-final approval to Invesco Ltd.'s PowerShares Capital Management unit to issue ETFs that take the mix-and-match investing approach -- buying securities actively picked by a money manager, rather than simply tracking an index.
Regulators are expected to issue similar notices to Barclays PLC's Barclays Global Investors and Bear Stearns Cos. as soon as today, according to people familiar with the matter. Final approval of these actively managed ETFs requires a few more steps. Nevertheless, it is expected that the new ETFs could start trading in as little as a month.
The Investment Company Institute trade group recently formed a permanent ETF committee to address industry issues, given the increased importance of ETFs.
The concept of actively managed ETFs has been tossed around for years in regulatory and mutual-fund circles. However, the SEC has been slow to approve the products as it has grappled with a host of issues.
Among the concerns: Whether active ETFs would trade more rapidly in their portfolios than traditional ETFs. Increased turnover in a fund's portfolio can trigger higher trading expenses and also generate bigger tax burdens.
Another main issue centers on how often the funds will disclose their holdings. While typical index-tracking ETFs disclose their holdings daily, concern arose about whether firms would be reluctant to offer such frequent information about actively managed ETFs for fear that investors would try and "front-run," or trade ahead of, the products.
Traditional mutual funds can be bought or sold just once a day. They generally report their holding less frequently, such as month-by-month or quarterly.
ETF providers have offered a variety of solutions to the issue. Some of the ETFs expected to receive the preliminary SEC approval today propose releasing daily holdings information. BGI, for instance, is proposing an iShares Euro Currency Fund and iShares Pound Sterling Currency Fund, which are funds designed to offer a way to bet on the dollar. The funds invest mostly in short-term securities like corporate bonds and commercial paper, and debt obligations of governments or government agencies, and would disclose their portfolio holdings daily.
Many other ETF providers are waiting in the wings for approvals for their own actively managed ETFs.
