BlackRock Plans Nontransparent Active ETFs

September 01, 2011


Officials at San Francisco-based iShares declined to comment on the filing.

“Applicants believe that the availability of real-time pricing information will allow market participants to hedge trading exposures in shares effectively and permit the efficient trading of shares in the marketplace without the need for daily disclosure of the funds’ portfolio holdings,” the filing said.

“Further, Applicants believe that nontransparency avoids the risks of ‘front running’ and ‘free riding’ to which actively-managed funds that disclose their holdings are subject.”

BlackRock specifically mentioned a number of domestic equity ETFs it plans to roll out should the SEC approve its application, and also made passing mention of fund-of-funds strategies that could be rolled under the same exemptive relief.

It wasn’t immediately clear if the new funds would be marketed under the BlackRock or iShares name, though it's quite likely they will be iShares funds since iShares is the ETF arm of BlackRock's vast money-management business.

San Francisco-based iShares manages more than $430 billion in ETF assets, all of them indexed strategies, save for one, the iShares Diversified Alternatives Trust (NYSEArca: ALT). ALT, an active strategy with fully transparent holdings that are disclosed daily, was down 1.2 percent year-to-date through Aug. 26.

For its part, New York-based BlackRock is the world’s largest asset manager, with a total of $3.66 trillion under management as of June 30, according to information posted on the company’s website.

Exemptive relief grants fund firms exemptions from parts of the Investment Company Act of 1940, giving them the right to market ETFs. It typically takes six to nine months from the time an exemptive relief filing is made for the first funds under the exemptions to reach market.

iShares did obtain exemptive relief to market actively managed funds early this year, but it only covered ETFs that are transparent and disclose portfolio holdings daily.

Transparent Active Funds

BlackRock’s plans amount to a radical departure from actively managed strategies to date.

As it stands, the SEC requires daily disclosure of portfolio holdings of any ETF, whether it’s actively or passively managed.

Companies like AdvisorShares, Pimco and WisdomTree have had some success gathering assets in such actively managed strategies that disclose holdings daily.

For example, the AdvisorShares Cambria Global Tactical ETF (NYSEArca: GTAA) now has about $174 million in assets, and the Pimco Enhanced Short Maturity Strategy (NYSEArca: MINT), a money-market fund proxy, now has more than $1.3 billion in assets.

Additionally, the WisdomTree Tree Emerging Markets Local Debt Fund (NYSEArca: ELD) has gathered more than $1.4 billion.

Apart from these success stories, most actively managed funds that have gained any traction are fixed-income or currency strategies.

As things stand, just over $6 billion in assets are in active ETFs, or around 0.5 percent of the $1.064 trillion in total U.S.-listed ETF assets at the end of August, according to data compiled by IndexUniverse.


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