FactorShares Files To Offer '40 Act ETFs

August 04, 2011

FactorShares, a New York-based money management firm, filed paperwork with U.S. regulators to market a series of “factor ETFs” that would tap into everything from domestic and global equity to fixed income, which would add to an existing group of funds it already markets under separate regulatory approval.

The filing seeks “exemptive relief” under the Investment Company Act of 1940 – a necessary regulatory step a company needs to take in order to market ETFs -- to offer what it described as standard ETFs, long/short funds as well as 130/30 funds – long/short strategies where long positions outweigh short ones.

The ETFs, which could include a mix of domestic and foreign equities, depositary receipts and fixed-income instruments, would each track a respective benchmark, the filing said.

FactorShares first entered the ETF space with the launch of five leveraged spread ETFs in February designed to help investors navigate sideways markets and shifting risk premiums. Those ETFs, which include futures contracts in their strategies, were registered in February 2010 under the Securities Act of 1933 as commodity pools.

The funds, which have each gathered anywhere from $2.2 million to $5.4 million, are essentially a bet on the spread between the S&P 500 Index and another benchmark. Leading the pack is the bullish S&P 500/bearish U.S. dollar fund, (NYSEArca: FSU), which has amassed $5.4 million in assets. The company’s bullish gold bet against the S&P 500, (NYSEArca: FSG), is a close second.

Also, in an effort to gain a competitive edge in a quickly crowding ETF space, FactorShares offers commission-free trading on those spread ETFs through Interactive Brokers’ platform.

Its new exemptive relief filing didn’t contain specific fund information, such as planned tickers and fees. But its five spread ETFs each cost 0.75 percent in management fees, with the full expense ratios somewhere between 1.1 percent and 1.2 percent, the company has said.

Exemptive relief filings grant the ETF firms exception to sections of the Investment Act of 1940 and are just the first step in the path to launching ’40 Act ETFs. Unlike registering funds under the ’33 Act, it often takes at least six to 12 months from the date of the initial exemptive relief filing for a company’s first ’40 Act ETF to hit the market.


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