ETF Watch: New SEC Rule Seen Helping Active ETFs

The barrier to entry in the ETF market for actively managed ETFs has been lowered.

The Securities and Exchange Commission on Friday approved exchange-filed requests led by Bats Global Markets, which owns ETF.com, for a standardized framework that would streamline the creation and listing process for active ETFs.

As regulation stands today, ETF issuers have clear guidelines on how to create and launch index-based funds, but actively managed strategies are treated on a one-by-one basis. There’s no clearly defined regulatory procedure for so-called managed funds.

That lack of a streamlined guideline has made the process of bringing to market active ETFs more labor-intensive, more time-consuming and costlier than for passive ETFs.

“By putting in place this template, we’re helping issuers of all sizes bring often highly innovative products to the market in a matter of weeks, and with more certainty of approval. Previously, active ETFs have only been approved case-by-case, and the process has taken months,” Chris Concannon, CEO of Bats Global Markets, said.

What this all means for the industry remains to be seen. In theory, an easier listing process should decrease the time it takes these funds to come to market, and help proliferate the number of active ETFs.

“Codifying the process should help grow both the number of active ETFs and the assets under management in these funds. The previous process was a barrier to entry, and the approval of a standardized framework removes that barrier almost entirely," Concannon said.

The SEC decision should change the “ratio of index to active ETFs” going forward, according to him, and that’s a good thing, he says. Concannon’s views are echoed by ETF issuers alike, particularly those bringing to market active funds. 

"This approval by the SEC will save additional time and costs associated with launching an actively managed ETF, as compared to a passively managed ETF, including both traditional index and custom indexes," he added. "In addition, for smaller firms such as AdvisorShares, this improves our competitive advantage for introducing skilled portfolio managers in an actively managed ETF structure."

But some eight years since the first active ETF came to market, the segment remains small, representing less than 1% of total U.S.-listed ETF assets. Active management in ETFs, particularly in the equity space, has had a difficult time gaining traction due to lack of consistent outperformance relative to indexes, higher fees and a lack of star managers.

Either way, a rubber stamp on a generic rubric for filing and launching active ETFs that would reduce inefficiencies in the regulatory process is widely perceived as beneficial for exchanges, issuers and investors alike.

You can see the Bats filing in its entirety here. NYSE Arca filed a similar petition last year.

Contact Cinthia Murphy at [email protected].