BlackRock, the parent of the world’s largest ETF firm, iShares, filed paperwork with the Securities and Exchange Commission to gain permission to market nontransparent, actively managed ETFs, a major development considering BlackRock’s size and the fact that active ETFs have yet to take off.
Unlike transparent active ETFs already on the market from the likes of AdvisorShares and Pimco, BlackRock’s “exemptive relief” petition to the SEC is pushing for periodic portfolio disclosures such as those the commission required for mutual funds. It’s also quite unlike plans for nontransparent ETFs the mutual fund company Eaton Vance has in the works.
At the center of BlackRock’s plans is a blind trust working on behalf of the authorized participant (AP) that would keep disclosure of portfolio holdings under wraps until regulators require it. Existing mutual funds must disclose holdings every three months with a lag, and it appears BlackRock’s plan, if approved by the SEC, would include disclosure requirements similar to those in place for mutual funds.
“While the funds are nontransparent ETFs, Applicants do not believe that the Funds raise any significant new regulatory issues or that the lack of disclosure regarding a Fund’s portfolio holdings on daily basis will in any way make the fund more susceptible to manipulation for the benefit of one group over another, the filing said.
Day to day, though, APs for the products would effectively be doing creations and redemptions for cash and hedging the funds based on the fact that they could redeem shares for the exact cash value of the funds’ net asset value (NAV). Creations and redemptions would happen in kind in the blind trust, allowing the fund to enjoy some of the tax efficiencies that transparent ETFs currently enjoy.
Crucially, the blind trust would be able to do what APs at the center of any index-based ETF are able to do as well, such as eliminating higher-cost securities to get rid of imbedded capital gains at the fund level. Such cherry-picking of securities is a key reason ETFs are considered to be more tax efficient than mutual funds.
BlackRock’s concept goes to the heart of an ongoing pursuit in the money management industry to provide strategies that aim to beat market benchmarks. A big part of that pursuit is a belief among managers that keeping portfolios secret gives them an edge over others in the market. Without that, they say, anybody can quickly steal their “secret sauce” and undermine their edge.
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