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The holdings of traditional index-based ETFs are transparent, which allows the market maker to keep the price very close to the funds NAV and avoid substantial premiums or discounts on the fund. That would not be the case with an actively managed ETF, however, that does not disclose its holdings.
"At this point in time, it is far from clear how this [arbitrage] mechanism could work in the case of an ETF whose portfolio is actively managed," the ICI letter says. "For a variety of reasons, including logistical burdens and increased trading costs associated with disclosing an [active] ETFs portfolio holdings on a real-time basis, it is likely that all or part of the funds portfolio will not be publicly disclosed. As a result, an actively managed ETF may be unable to maintain a market value that tracks NAV."
One way of getting around this problem would be for an ETF to "selectively disclose its portfolio" to the creation unit holders but not to retail investors, the letter says. However, that would be greatly unfair to retail investors because it allows one group to trade based on that information, but not the other, according to the ICI. The Institute therefore recommends that the SEC only allow ETFs that has holdings that are completely disclosed.
" we are concerned that actively managed products that are not fully transparent will lack the efficient arbitrage mechanisms necessary to reasonably ensure that their shares will trade throughout the day at prices that track NAV," the letter says. "We believe that suck products raise significant investor protection concerns and the Commission should carefully consider whether these concerns outweigh the potential benefits of these products."