State Street Global Advisors, the fund sponsor behind SPY, the first and biggest U.S. ETF, filed regulatory paperwork to gain permission to market nontransparent, actively managed ETFs that is essentially identical to paperwork iShares’ parent BlackRock Inc. filed in the summer of 2011 and the one Precidian Investments submitted early this year.
Unlike already-live transparent active ETFs—like Bill Gross’ nearly $5 billion Pimco Total Return ETF (NYSEArca: BOND)—SSgA’s “exemptive relief” petition to the SEC is asking to market ETFs that have periodic portfolio disclosures, such as those the SEC requires for mutual funds. In fact, the SSgA petition is based on the very same patent as the BlackRock and Precidian proposals.
At the center of State Street’s proposal is a blind trust that works on behalf of the authorized participant (AP) that would keep disclosure of portfolio holdings under wraps until regulators require it. Existing mutual funds must disclose holdings every three months with a lag, and it appears that the new plan, if approved by the SEC, would include disclosure requirements similar to those in place for mutual funds.
State Street noted in the paperwork that it has three separate nontransparent, active funds in mind in the event the Securities and Exchange Commission does approve the petition. Those funds are:
- SPDR SSgA Equity ETF
- SPDR SSgA Emerging Markets ETF
- SPDR SSgA Aggregate Bond ETF
State Street’s plans, and those of BlackRock and Precidian, are part of a broader trend in the world of ETFs to offer up a mechanism that would allow fund companies to seek outperformance with actively managed strategies that enable mutual fund managers to keep portfolio holdings under wraps long enough to profit from ostensibly superior ideas.
Other such plans similar in spirit, though different in structure to what SSgA is proposing, are those for the nontransparent ETFs the mutual fund company Eaton Vance has in the works. Eaton Vance proposes bringing to market exchange-traded managed funds, or ETMFs, that make use of what it calls “NAV-based trading.”
All these nontransparent active ETFs stand in sharp contrast to the vast majority of existing ETFs, which are indexed vehicles. Indeed, more than 99 percent of the $1.5 trillion invested today in U.S.-listed ETFs is in indexed vehicles, with the remainder in funds like Bill Gross’ BOND, which is active but must disclose portfolio holdings daily.
BOND is the most successful active ETF to date, but some industry sources believe that if State Street’s nontransparent active plans are approved, many mutual fund companies that have made tentative steps to begin offering exchange-traded funds might leap head-first into the ETF business if they could keep their portfolio disclosures to a minimum, as they do now.
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