SEC Precidian Ruling Is An Active ETF Game Changer

With the Securities and Exchange Commission (SEC) pushing forward with non-transparent exchange traded funds, more money managers may enter the ETF space with their own active strategies without worrying about others stealing their secret sauce.

“What it means for us is we can bring out strategies – true alpha generating strategies – into the ETF space, which you couldn’t do in other structures. Think of an ETF, whether it’s us or anyone else; you can bring out an ETF with 20, 30 holdings, now that have high turnover then nobody can front run the trades, and you can truly get that alpha generating strategy that you couldn’t with a mutual fund in the ETF wrapper going forward and that is not the case today,” Ed Rosenberg, Senior Vice President, Head of ETFs, American Century Investments, said at the Morningstar Investment Conference.

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The SEC recently said in a filing it plans to approve Precidian Investments’ non-transparent ETF proposal, which would open the doors to a new category of actively-managed, non-transparent ETF products.

The Precidian funds will disclose daily holdings only to a new subset of professional trader called the “authorized participant representative” in order to facilitate the process of creation and redemption of ETF shares. Because it is an ETF, ActiveShares requires no new operational changes and fits seamlessly into existing platforms. This makes it easy for licensees to provide active investment strategies in an ETF structure.

With more traditional mutual funds eyeing the ETF space but remaining reluctant to give up their secret sauce under the transparency of the ETF investment vehicle, many are looking into non-transparent exchange traded products as a way to combine the best of two worlds.

Many other asset management firms have filed applications with the SEC for exemptive relief to allow them to launch actively managed funds under a non-transparent product structure.