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T. Rowe, Fidelity score green light for ETFs that hide holdings

Regulators are set to approve four new flavors of ETFs that keep their holdings secret, notching a win for active managers.

The SEC said it plans to approve active nontransparent ETFs from T. Rowe Price, Natixis, Fidelity and Blue Tractor, according to filings on Thursday. The funds will reveal their holdings at least once a quarter, rather than disclosing their portfolios every day like conventional ETFs.

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The regulator is warming to the concealed holdings approach, after more than 10 years of considering the concept. Active managers say that inserting their strategies into a transparent ETF format would give away their best investment ideas and expose them to front-running. Still, they have been looking for a way to participate in the boom that ETFs enjoyed over the past decade.

Fund managers see the active nontransparent model as an entry point into the $4.2 trillion U.S. ETF market. But it remains unclear whether retail investors will adopt the model over traditional ETFs that keep their holdings public.

“It’s a big regulatory win, but now comes the hard part: trying to attract assets in an utterly brutal marketplace where nearly every cent goes into products charging 0.2% or less,” said Eric Balchunas, an analyst at Bloomberg Intelligence.

All four firms plan to follow a so-called proxy-basket approach, meaning they will disclose some information about their holdings every day to help market makers price their funds, just not their full portfolio.

The correlation between fees and performance is not “apples-to-apples when taking the funds’ underlying exposures into account,” an expert says.
July 17

Precidian Investments already has approval for an alternative structure that requires funds to publish an indicative value of the holdings every second. This model also uses an agency broker to confidentially buy and sell securities to help money flow into or out of the fund.

New York Life’s IndexIQ, BlackRock, JPMorgan Chase and American Century Investments are among the firms that have licensed Precidian’s model.

Bloomberg News

Bloomberg News