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Non-transparent ETF poised for regulator approval

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An ETF that doesn’t have to reveal its assets is poised to get the regulator’s blessing after a more than four-year wait.

The SEC plans to issue an order granting Precidian Funds permission for the new type of ETF, the watchdog said in a notice Monday. Market participants can still request a hearing through May 3, the regulator said; if granted, that could potentially delay or derail the final approval. The funds also need permission to start trading from another division of the SEC.

The decision is a huge win for stock pickers who have long pushed back against a requirement that funds publish their investing positions daily. Revealing an active ETF’s holdings so regularly may leave it exposed to front runners seeking to capitalize on predicting its next move. That concern has seen the likes of $1.1 trillion asset manager T. Rowe Price and $1.6 trillion Capital Group remain on the sidelines of the $3.8 trillion market.

“This is a truly exciting new product that can revolutionize the way that investors approach ETFs,” said Thomas Hoops, head of business development for Legg Mason, which has a stake in Precidian and has licensed the new structure. “We can couple the benefits of the ETF wrapper with active management expertise, while protecting investors and our portfolio managers’ intellectual property,” he said in an emailed statement from Precidian.

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If given the final nod, Precidian will calculate and disseminate the indicative value of its ActiveShares ETFs every second to help the fund’s price stay in line with the value of its underlying assets, and will use agents who can see the funds’ holdings to help move cash in and out, according to regulatory filings. The Bedminster, New Jersey-based company plans to report its funds’ holdings once a quarter, like a mutual fund.

Robert Jackson, an SEC commissioner, voted against issuing the notice allowing Precidian’s plans to proceed, according to an emailed statement from his office.

Fees were nearly half the price of the top-performing active funds.
September 4

“I am not persuaded by the record before me today that the application provides an adequate substitute for the transparency that has been the hallmark of our ETF regime for decades,” he said. “If the application is ultimately approved, however, I urge the staff to keep a close eye on this.”

Other issuers, including BlackRock and JPMorgan Chase, have already licensed the structure, according to a statement from Precidian. But while asset managers seem interested, some analysts are skeptical about the appeal to investors.

There are already about 270 active ETFs that do reveal their holdings. And Eaton Vance has so far failed to lure assets to a clutch of non-transparent funds it started in 2016 using a different structure.

“Transparency I would say is in the top five most beloved traits of ETFs — this challenges it,” says Eric Balchunas, an ETF analyst at Bloomberg Intelligence. “These are probably going to have a hard time.”

Bloomberg News