While the storied Bear Stearns went up for a fire sale of $236 million to JPMorgan last week, less than one-tenth of its trading price, Bear hit another brick wall.
Bear Stearns faced a false start for its actively managed Bear Stearns Current Yield Fund, the first so-called actively managed ETF that was supposed to begin trading on last Tuesday under the symbol "YYY" on the American Stock Exchange.
A Bear Stearns' spokesperson did not return a call seeking comment. But speculation is that JPMorgan's unexpected March 16 announcement that it would acquire 85-year-old Bear Stearns was the real reason the launch of the nation's first actively managed ETF was put on hold, possibly indefinitely.
The short-term, fixed income ETF was to be managed by Bear Stearns Asset Management, the securities firm's investment management arm. Whether or not JPMorgan will launch an equivalent version of this ETF is unclear.
That expected debut was to be a coming-out party for the very first exchange-traded fund that would march to its own drummer and not closely follow an underlying index.
Up until now, all publicly traded ETFs have tracked to a third party or proprietarily created index. But four ETFs had, just weeks ago, been given the green light by the Securities and Exchange Commission to sidestep the pack and actively pick and choose which securities to buy and sell for their basket of stocks.
In the race to be the first to get to the actively managed ETF starting gate, a proven need given Barclay's early advantage and mammoth market share in the industry, in late February, PowerShares Capital Management, a unit of Invesco, announced that its four actively managed ETFs were the first to receive the regulator's blessing.
The quartet of funds includes two equity ETFs that use a ranking system developed by AER Advisors, an equity ETF that uses a quantitative methodology prevalent in Invesco's institutional division, along with a low-duration fixed-income ETF.
Almost simultaneously, at the end of February, the SEC gave its preliminary nod of approval to three other actively managed ETF sponsors to move forward: Barclay's Global Investors, Bear Stearns and WidsomTree.
But Bear Stearns beat PowerShares out of the gate. But now that the news erupted last week that the investment bank needed to be bailed out as a result of its subprime exposure, the firm has put that glory-and potential windall-on hold.
Meanwhile, PowerShares is expecting to debut its actively managed ETFs sometime in early April, a company spokeswoman confirmed. Barclay's is currently in its SEC quiet period for the two currency ETFs it will debut, said a spokeswoman. Those ETFs may debut within the next few weeks. A WisdomTree spokesman noted that the debut of its first actively managed ETF is "close."
So Close, Yet So Far
While the industry continues to wait for the first actively managed ETF to arrive, the journey has been long and tedious. The late Nate Most, a trained astrophysicst, came up with the idea for the very first ETF, the "Spider," or S&P 500 ETF, for the American Stock Exchange [see Mutual Fund Market News, Oct. 2, 2000].
Later, when Most was serving as chairman of the board and president of the iShares Trust of Barclays Global Investors during the mid-1990s, he began talking about an active model for ETFs. With the stock market roaring and investors longing to pour into the markets, particularly through ETFs, Most packed industry executives in at industry conferences on the topic.
Then, the Securities and Exchange Commission began debating the idea of an actively managed ETF and issued a concept release on the topic in 2001.
That release, issued eight years after the very first index based ETF debuted, raised a variety of issues about price variations and arbitrage, and sought commentary from industry practitioners on how an active ETF could work.
This first wave of actively managed ETF expected to debut within weeks really represents only a "modest first step," said Gary Gastineau, principal of ETF Consultants of Summit, N.J. Before 2002 joining ETF Consultants, Gastineau had been instrumental in ETF product development at Nuveen Investments and before that, the American Stock Exchange. "What we need now is something that goes considerably further," he added.
One of the challenges to the whole idea of offering an actively-managed ETF is transparency. The SEC requires that ETFs disclose their holdings each day. That's fine for a traditional ETF that tracks to a very visible index. But actively managed ETF managers would prefer to trade without transparency.
Unlike a mutual fund, which must report its holdings quarterly and on a delayed basis, ETFs must report positions daily. An ETF manager can trade today, must announce its composition changes tonight and then make changes tomorrow in its creation/redemption baskets, Gastineau explained.
But that type of daily transparency can prove difficult and costly to managers who want to execute trading strategies without the marketplace being aware of what is being bought and sold. That can be especially difficult if a manager decides not to execute the entire position in one day, Gastineau said. Investors pretty much know the manager will be trading more of that position the next day and may try to front-run that trade.
That process can significantly drive securities prices up or down and negatively impact the ETF's costs, he added. Gastineau is currently drafting a white paper which will explore the true costs of trading transparency as well as a proposal as to how to solve some of the problems now associated with actively-managed ETFs.
Desperately Seeking Opaqueness
"Most fund managers would rather shoot their own mothers before giving away their trading strategies," said George Simon, a partner with the New York office of the law firm Foley & Lardner. "The SEC has approved a fully transparent actively managed ETF model. Their goal is to look at less transparency in 2008," he said. The challenge is how to provide managers more opacity and prevent someone front-running a manager's trades or getting a free ride by paralleling an actively managed ETF and essentially duplicating its investment strategy without paying for that expertise, he added.
Moreover, the jury is also still out on whether actively managed ETFs will garner the interest of institutional investors before they have a three-year track record to tout, or whether retail investors will be those feast on active ETFs. If the latter is true, then the industry will grow at a slower pace, he predicted.
The industry must collectively innovate a less transparent active ETF, Archard noted. "In the active ETF space, getting it right will be more important than being their first," he summed up.
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