‘Start of a new era’: SEC approves first non-transparent active ETFs

SEC approves non-transparent ETF

The US Securities and Exchange Commission (SEC) is set to approve a range of non-transparent ETFs in a move that could bring more active players to market.

According to a filing on Monday, Precidian Investments received approval to launch its actively managed ETF range called ActiveShares that will not be required to disclose its holdings on a daily basis, a rule that has been in place in the US and other markets since ETFs were first launched.

The SEC has previously twice declined to approve the firm’s non-transparent active ETFs over the past five years.

In the new structure, Precidian will still be required to disclose its daily holdings to authorised participants in order to facilitate the creation and redemption process.

The ActiveShares structure has already been licensed by big name players including Legg Mason, BlackRock, JP Morgan and Nuveen.

This could be the catalyst that leads to regulation changes in Europe. Last September, the Central Bank of Ireland pushed back on changing the rules around daily disclosure in its discussion paper, despite calls from some parts of the industry to have less transparency.

At the time, the CBI said respondents were in favour of a more “nuanced” approach to portfolio disclosure however, the regulator said full transparency provided “clarity” to market participants and enabled investors to monitor the underlying investments.

The case for non-transparent ETFs

Rules around daily disclosure has divided opinion across the ETF industry. James McManus, head of ETF research at Nutmeg, said this would be “the tipping point” for active managers considering entry into the ETF industry. 

Previously, some active managers had been wary of entering the ETF space because revealing their holdings daily gives away their skill in stockpicking while exposing them to front runners.

McManus commented: “An approval of this type of structure was inevitable and has been the direction of travel for some time. Rarely, if ever, has a reduction in the transparency of a market or product benefitted end investors. It will be critical to ensure that all liquidity providers have access to the appropriate information to ensure sufficient price competitiveness.

“Investors should likely expect the European regulators tolerance for this type of structure to be tested again in the near-term, and this could be the start of a new era for active ETFs.”

However, Hector McNeil, co-founder and co-CEO of HANetf, who has long been an advocate for non-transparent active ETFs, said his firm was having discussions with over 50 asset managers who have said they want to enter the ETF space once non-transparent products are allowed.

“We are very excited by this development,” he said. “As an investor if I feel an investment manager has an expertise or experience that is unique and they can use that to outperform in an asset class or market then I am happy to pay a premium for access to that IP and also I do not want them to share that with the world if I am paying for it.”

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