Time For SEC To Liberate Active ETFs

March 09, 2017

Matt Hougan is CEO of Inside ETFs.

Sensible proposals for nontransparent active ETFs have languished at the Securities and Exchange Commission for years; it’s time to let them free.

I spent much of last week in New York City visiting with ETF issuers. Amid a number of great meetings and a lot of excitement around things like electronic RFQ trading, socially responsible investing and more, one meeting stood out to me: Davis Advisors.

Earlier this year, Davis took the brave step of launching three fully transparent actively managed equity ETFs: the Davis Select U.S. Equity ETF (DUSA), the Davis Select Worldwide ETF (DWLD) and the Davis Select Financial ETF (DFNL).

There are plenty of transparent actively managed ETFs out there, but the Davis funds are brave because they use the same underlying strategy (and presumably create similar portfolios to) Davis’ existing active mutual funds, including its $12 billion flagship, the Davis New York Venture Fund.

That fund launched in 1969 and has posted a compound annual return of 11.66%. As noted on its website, “a hypothetical $10,000 investment in the Fund on February 17, 1969, compounded to $1,966,380 as of December 31, 2016…” That has far outpaced the S&P 500 during a time when it has been hard to outpace the S&P 500. Impressive.

Not Bothered By Daily Disclosure

To launch the fund, Davis (like other active ETF pioneers before it) agreed to the SEC’s requirement that active ETFs fully disclose their entire portfolios at the end of each trading day. That stands in contrast to mutual funds, which must only disclose their holdings quarterly with a 60-day lag.

In other words, right now, the most recent portfolio disclosure for a mutual fund would be from Halloween. Given that the average mutual fund turns over its portfolio 85% a year, by the time disclosure is required, it’s likely that one-third of the portfolio is no longer held by the fund.

Davis says it’s not bothered by transparency, as it invests in large, liquid securities and holds them for the long term. Investors wanted access to its strategies in the ETF format, so it launched ETFs to meet that demand.


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