Jonathan Liss, of Seeking Alpha, recently spoke to Laura Morrison, who is the head of US Exchange Traded Products (ETPs) at NYSE Euronext which lists more than 1,200 ETPs with close to a $1 trillion in assets. Morrison opines on the banner year that 2010 has been for ETFs and also talks about future developments including actively-managed ETFs.
Asked about what kind of new products she sees coming to market, Morrison said, “I also expect we’ll see more actively managed ETFs come to market, both of the transparent and possibly non-transparent nature.” Morrison indicated that she believes the hype surrounding actively-managed ETFs is not misplaced and that it’s more a matter of time before they take off and gain a strong following.
The possibility of non-transparent Active ETFs, brought to the forefront recently by Eaton Vance’s acquisition of Managed ETFs LLC, has also raised the question of why then would investors pick actively-managed ETFs over active mutual funds if they prove to be just as opaque. Morrison highlights that two key advantages will continue to put the Active ETF structure ahead of the mutual fund as an investment vehicle – tax efficiency and intra-day tradability.
In a mutual fund, all existing investors bear the capital gains burden whenever an investor sells out of their units for a capital gain, because the portfolio manager has to sell securities to fund the withdrawal. In contrast, in an ETF structure, investors are only responsible for their own transactions and don’t pay for capital gains taxes because of other investor’s withdrawals. Morrison explains this advantage, “The tax advantages shared by all ETFs over Mutual Funds in which they allow the holder to decide when to trigger a taxable event as opposed to with mutual funds, which as pooled investments, are a lot more likely to trigger taxable gains even for long-term buy and hold investors who had no activity personally in a given year.” This feature of mutual funds hit investors hard in 2008 as they suffered the double-whammy of unrealized investment losses while still having to pay taxes.
The second advantage that non-transparent actively-managed ETFs could retain over active mutual funds, depending on how the non-transparent ETFs are structured, is the intraday tradability that can be important in very volatile markets. “Investors will be able to sell active ETFs immediately as opposed to having to wait until after the market closes to settle, as is the case with mutual funds. There were days in 2008 where this literally would have meant cashing out with 5% or 8% more.”
Morrison works very closely with the SEC and the different ETF manufacturers in bringing ETFs to market. She also commented on the SEC’s moratorium on exemptive relief approvals for issuers wanting to launch derivatives-based products, which they announced in March 2010. “We have managed to get some new innovative products approved but there has been a definite slowdown in the pipeline. A lot of it has to do with the regulatory bodies building out their processes and knowledge base of these products, catching up to the innovation curve so to speak.” The slowdown is what has quite a few Active ETF issuers concerned as the regulatory overhang on the space adds significant uncertainty to their product development plans.
Disclosure: No positions in above-mentioned names.
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