As of July, there were 28 actively-managed ETFs on the US market that investors had access to. These were provided by 7 different issuers which include WisdomTree, Grail Advisors, AdvisorShares, iShares, PIMCO, PowerShares and U.S. One. In contrast, there are roughly 24 firms that have filed for plans to launch actively-managed ETFs with the SEC, some with early stage exemptive relief filings and while others are further down the road and have already filed preliminary prospectus for their Active ETFs. These 24 firms include the likes of Eaton Vance, JP Morgan, T. Rowe Price, Goldman Sachs, Legg Mason, John Hancock and many major fund managers in the US. Despite the deluge of filings for actively-managed ETFs, we have only seen 6 new products actually launched and begin trading on the market in 2010.
So have Active ETF filings have gotten ahead of actual product plans? In a recent interview with ActiveETFs | InFocus, COO of WisdomTree Investment – Bruce Lavine, reflected on the issue saying, “I would say that filings are ahead of the thoughtful strategies at this point. But, nevertheless, you are seeing a fair amount of activity”. Having seen the vagueness of many of the filings that have been made with the SEC by issuers, there is some basis for Lavine’s point. One could be excused for thinking that many of these issuers are trying to claim a stake in the Active ETF space now “just in case” these products really take off. Knowing that the SEC approval process can be arduous and lengthy, these issuers may have been keen to get the process rolling so that if and when the opportunity comes to launch actively-managed ETFs, they can do so with a shorter time to market. As a result, we have seen quite a few very generic filings that seek relief from the SEC for Active ETFs with widely ranging mandates allowing all kinds of investments, the idea being that once the time comes to launch an actual fund, issuers can pick and choose the strategy they wish to pursue.
However, Patrick Daugherty – a partner at Foley & Lardner LLP who was behind the launch of the first actively-managed ETF in 2008 – provides some context. “It is usually the case that several funds will be prepared for launch with full expectation that a smaller number of them actually will gain traction and succeed commercially”, said Daugherty. He suggests that it is typical to bring several ideas to the market and to the SEC specifically at once and then whittle them out over time. This provides some explanation for the lopsided ratio of planned products to actual launches, especially considering that the Active ETF space is still very young.
Of course, another reason for the very few filings that have gone through the SEC to reach the market could be the SEC itself. Daugherty suggested that may well have something to do with the slow time to market, saying that, “Right now, the agency is paralyzed when it comes to new product development. We think there is some reluctance to allow additional new products because of the recent unprecedented turmoil in the markets”. Another big factor that is likely contributing to the lengthy SEC approval process is the SEC’s ongoing investigation of derivative usage in ETFs. While the focus of that investigation has been on leveraged and inverse ETFs, there is little doubt that actively-managed ETFs have also been affected because numerous issuers have amended their product plans to remove the usage of derivatives.
Shishir Nigam is the founder of ActiveETFs | InFocus (http://www.etfshub.com/), which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.
Disclosure: No positions in above-mentioned names.
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