In a filing with the SEC earlier this month, iShares requested approval to launch two actively-managed ETFs. One of the proposed funds would invest in equities while the other would invest in bonds. Following the recent launch of the first actively managed fund by Grail Advisors earlier this month, iShares’ move indicates that this segment of the ETF industry may be poised for explosive growth.
In its filing, Barclays indicates that the two actively managed funds will be:
- iShares Active Equity Fund: This ETF would actively invest at least 80% of its assets in the largest 1,000 stocks trading on domestic exchanges. In addition to equities, the fund managers would have the discretion to invest in a wide variety of derivatives.
- iShares Active Fixed Income Fund: This ETF would rely on “proprietary quantitative models to allocate assets…among different maturities based on yield characteristics and expectations.” The fixed income fund would invest primarily in investment-grade securities, but could have as much 30% invested in junk bonds at any given time.
Opening the Floodgates?
iShares petition comes on the heels of the launches of several actively-managed ETFs, including Grail Advisors’ large cap value fund and WisdomTree’s active currency ETFs. In addition, Claymore recently filed to launch an actively-managed commodity ETF.
Despite the presence of these relatively small funds, iShares entrance into the actively-managed ETF arena could signal the opening of the floodgates. Previously, concerns over the disclosure requirements mandated by the SEC have kept many of the major ETF sponsors out of the actively-managed ETF business. It appears that these concerns begin to be easing, perhaps since new strategies for avoiding “frontrunning” by traders are deemed to be relatively effective. While it’s too early to tell for sure, I wouldn’t be surprised one bit if the number of actively-managed funds on the market and in the pipeline hits 100 by the end of the year.
I’ll also be keeping an eye on the source of funds for these actively-managed ETFs – whether they cannibalize existing indexed ETFs or attract cash from mutual funds, as this could determine the rate at which ETF sponsors begin pumping out new actively-managed funds.