Claymore Advisors has an interesting proposal on the table these days. The firm is looking to convert the Claymore/Raymond James SB-1 Equity Fund (NYSE: RYJ), which is a closed-end fund, into an exchange-traded fund—on May 12, RYJ's board of trustees gave preliminary approval to the idea.

This isn't necessarily as radical a step as it sounds—it's actually what RYJ was designed to do. The fund has a clause that says that after 18 months of trading, if it should trade at a discount of 10% or more for more than 75 consecutive days, it will convert from a CEF to an ETF. The crinkle in all this comes in with the 75 consecutive days—while the fund has been trading at a 52-week average discount of 10.15%, it sporadically dips slightly below the 10% threshold, meaning that the 75-day period must begin all over again before the conversion can be triggered.

"It kept restarting itself," said Dennis Dunleavy, a Claymore spokesperson. He said that the board took the step of putting the conversion into effect out of concern that the trigger was not being initiated, even though the discount was usually well over the 10% threshold.

What remains is getting shareholder approval and—should that be achieved—engineering the transformation. The matter will be put to a shareholder vote during the fund's annual shareholder meeting on or before August 29.

According to Claymore's Web site, RYJ has been trading at an average 52-week discount of 10.15%. While discounts and premiums are not unusual for CEFs, that is unusually large—it's no wonder that Claymore is seeking an unusual solution. The discount, it should be noted, shrank dramatically after the approval from the board of trustees was announced—from 10.07% to 4.18% in one day—at the same time RYJ's trading volume spiked from less than 25,000 to more than 465,000.

Evidently there is some enthusiasm for the transition, which is really not surprising. Such a large discount would be unlikely to occur with an ETF structure, and shareholders could be reasonably certain that their investment would trade at its actual value.

RYJ's state goal is capital appreciation, which it seeks to achieve by investing in equities rated SB-1, or "Strong Buy 1," by equity analyst firm Raymond James & Associates. The portfolio is currently weighted most heavily toward Information Technology (24.40%), Energy (18.30%), Consumer Discretionary (17.40%) and Health Care (13.80%). Its share price is up about 7%, year-to-date.

Should the conversion be completed, the restructured fund would track an index comprised of SB-1-rated companies. (Of course, with actively managed ETFs already trading on U.S. exchanges, an index may not even be necessary.)

Editor's note: Some time back, PowerShares filed for a CEF with the capability to convert to an ETF once a certain discount threshold had been breached; however, it has not launched. (Read the August 2007 article here.)