The ever-changing competitive landscape continues to shift in the ETF industry, with updated regulatory filings from two giants in the indexing and money management space that could soon be a bigger part of the ETF industry. Russell wrote the SEC to “ respectfully request the withdrawal of the Applicants’ application for” exemptive relief that was filed in January 2010. Earlier this year, Russell acquired Reno-based U.S. One, the issuer behind the One Fund (ONEF) that offers exposure to domestic and global equities. In that acquisition, Russell acquired the exemptive relief held by U.S. One, essentially allowing the company to sidestep the approval process and accelerate its entry into the ETF industry.
Russell has since filed for several ETFs using the U.S. One exemptive relief, including a handful of products that would be structured as actively managed “ETFs of ETFs” similar to ONEF. In total, Russell has filed for more than a dozen active and passive ETFs, and the company's first products could begin trading sometime in the second quarter of this year.
Russell is the index provider behind many of the most popular domestic equity ETFs, but the company has been laying the groundwork for more direct involvement in the ETF industry.
Janus: Active ETFs Would Be Transparent
Janus (JNS), one of several major players in the mutual fund space that has taken the initial steps towards launching ETFs as well, also made a new filing with the SEC last week. The company indicated that any active ETFs launched would be transparent in nature, disclosing holdings on a regular basis. “After considering a variety of alternatives, Applicants determined that the best approach to providing a level of transparency that permits efficient arbitrage without compromising the statutory and fiduciary responsibilities of the Adviser would be to provide full transparency of each Fund’s portfolio,” said the filing.
There has been some speculation that non-transparent ETFs will become a reality in coming years, though significant regulatory hurdles remain. Many in the ETF industry point to disclosure requirements as the primary reason for the slow growth of the active ETF space. Requiring managers to disclose holdings on a daily basis exposes them to the risk of front-running. Traders would be able to monitor an ETF’s holdings and notice when the fund starts accumulating a position in a certain security. That could result in other investors bidding up the price of that security in an attempt to get in ahead of the ETF manager–a development that could obviously have an adverse impact on fund returns.
Allowing non-transparent ETFs would presumably help the active ETF space to grow, but it would complicate the manner in which the creation/redemption mechanism operates. One alternative would involve NAV-based pricing, a system that would allow investors to trade at a price relative to the net asset value of the fund that would be disseminated periodically. Earlier this year, Eaton Vance CEO Thomas Faust expressed his belief that non-transparent active ETFs won’t be a 2011 event. “We recognize that the transparency is a huge issue,” said Faust, whose company acquired a firm that owns patents related to NAV-based trading systems. “It is certainly our view that for a large percentage of active strategies, it doesn’t make sense to communicate to the world effectively in real time what you own and your trading activity.”
Disclosure: No positions at time of writing.
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