T. Rowe Price Files For Nontransparent ETFs

September 24, 2013

The mutual fund manager makes a serious move toward the ETF space.

T. Rowe Price has requested regulatory permission to market nontransparent ETFs in a filing that, if approved, opens the door for the firm to market a diverse array of ETF strategies. More importantly, it signals that the mutual fund manager is serious about its intention to carve a niche in the ETF space.

T. Rowe Price first sought permission to market ETFs in 2009, but this latest filing is broader—or as IndexUniverse’s Global Head of Content Matt Hougan put it today, “fairly ambitious”—seemingly expanding on the firm’s original request for permission to market actively managed funds.

“It’s a very broad-based filing,” Hougan said. “It would allow them to follow any investment strategy.”

T. Rowe Price is the latest large mutual fund shop to move forward with its efforts to enter the ETF space, in what seems to be a brewing industry trend among known mutual fund managers who are looking to tap into the growing $1.5 trillion ETF market. Indeed, just a few months ago, Boston-based mutual fund manager Eaton Vance also submitted similar paperwork seeking regulatory permission to market nontransparent ETFs.

“Here are two firms that have been tiptoeing around this space for a while,” Hougan said of both firms. “If one does it, it’s an idiosyncratic event, but if you start to see T. Rowe and Eaton Vance do it, you start to get a little momentum where the mutual fund industry is capitulating to the ETF wrapper.

“We haven’t gotten there yet because no one has actually launched a fund, but they are queueing up to do it in a meaningful way,” Hougan added.

It’s worth noting that both T. Rowe Price’s and Eaton Vance’s filings detail plans for nontransparent ETFs that would not be required to disclose portfolio holdings on a daily basis, but only periodically, as with mutual funds. And these firms are not alone. Other ETF giants like iShares, and more recently, State Street Global Advisors, have also taken steps to market nontransparent strategies.

If approved, these funds would add a new wrinkle to the ETF wrapper—which has been heralded for its transparency since its inception 20 years ago.

At the time of its request in March, Eaton argued that a nontransparent structure, as it hopes to launch, would allow investors to access a broad range of active strategies through a vehicle that provides the benefits of an ETF.

In its latest filing, T. Rowe Price said that the main difference between its proposed funds and other actively managed ETFs is that its nontransparent funds would provide—in lieu of full portfolio transparency—other information such as a hedge portfolio, daily deviation and an indicative net asset value (iNAV), that is “sufficient on its own to enable such arbitrage.” The much-heralded transparency of ETFs is what allows for daily creations and redemptions and their tight spreads.

“We see nontransparent active ETFs as an alternative vehicle for potentially delivering our investment management expertise to investors, without the prospect of daily disclosures impacting our existing mutual fund shareholders, consistent with their best interests,” a T. Rowe Price representative told IndexUniverse.



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