T. Rowe Modifies Application for Diversified Bond ETF

by: Shishir Nigam

T. Rowe Price (NASDAQ:TROW) filed an updated application with the SEC on Dec 30th, 2010 for its proposed actively-managed ETFs.

T. Rowe Price had first requested exemptive relief from the SEC to launch actively-managed ETFs through an initial 40-APP application in early December, 2009. The initial proposed fund was intended to invest in domestic fixed-income securities that would not have a fund-of-funds structure. In other words, the proposed Active ETF would have owned individual bonds instead of holding other ETFs or funds that in turn invest in fixed-income securities. The application also allowed for future funds to invest in global and domestic bonds as well as equities while still having the flexibility to utilize a fund of funds structure. In the initial application, T. Rowe specified that the Future Funds may invest in various derivatives.

That application was then amended in late February 2010 by T. Rowe Price to specify that the initial fund will be called the T. Rowe Price Diversified Bond ETF, which will seek to achieve total returns with an emphasis on income by applying a proprietary sector and security selection methodology. Sector weightings as well as the maturity and duration of the portfolio could be adjusted by the managers to make active bets on the market. Additionally, the amended 40-APP filing specified that neither the initial fund nor the Future Funds will invest in options, futures or swaps. Interestingly, this amendment was made just before the SEC announced its investigation into derivative usage within ETFs in March 2010. That announcement resulted in many ETF relief applications being put on hold and many issuers modifying their applications to explicitly exclude the usage of derivatives in their funds.

The latest modification updated the filing to include specifics on a master-feeder structure for the proposed funds and detailed what Feeder Funds and Master Funds would be allowed to do under the exemptive relief application.

The proposed Diversified Bond ETF will go into competition with existing actively-managed bond ETFs from PIMCO and Grail Advisors. However, when T. Rowe Price’s proposed fund will make it to market is anyone’s guess.

Disclosure: No positions in above-mentioned names.

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