Claymore’s RYJ May Go From CEF To ETF

August 22, 2008

A shareholder vote set for August 28 will determine RYJ's fate.

Claymore is proceeding with plans to convert the actively managed Claymore/Raymond James SB-1 Equity Fund (NYSE: RYJ), which is currently a close-end fund, into an ETF.

The fund's board of trustees approved the conversion back in May, and a shareholder vote scheduled for August 28 will conclude the matter. Assuming shareholders give the conversion their own thumbs-up, the Claymore/Raymond James SB-1 Equity ETF will begin trading on September 4 on the NYSE Arca - as opposed to on the NYSE, where the CEF currently trades.

While the CEF invests in the stocks rated "Strong Buy 1" (or "SB-1") by research house Raymond James, the ETF will use a similar approach captured by the Raymond James SB-1 Equity Index. And interestingly, the prospectus for the proposed ETFsays it will charge a management fee of 0.75%, although total annual expensesare left blank. So the ETF could work out to be cheaper than the CEF, whichcharges an annual expense ratio of 1.08%, an almost unheard-of expense for anETF.

But don't think this means there's going to be a wave of CEF conversions. This is really what RYJ was designed to do - a clause in its prospectus says that if, after 180 days of trading, it then trades at a discount of 10% or more to its fair market value for more than 75 days, it will convert into an ETF. The fund was frequently trading at a discount of greater than 10% of the time, but it would occasionally dip below the 10% threshold, resetting the count; as a result, Claymore took the step of bringing it to a shareholder vote despite the fact that it never triggered the 75-day clause.

The discount on the fund is currently 2.08%, but it has been more than 12%.

Will this kick off a trend? We're not sure. There's not a lot of incentive for a CEF provider to effect such a change. Shares of a CEF are fixed - there's no redeeming or creating, and investors can only sell shares to other investors - so converting to an ETF means opening up the fund for redemptions.

Moreover, currently, most ETFs are based on indexes, and there isn't yet a platform for nontransparent ETFs to exist. That limits the number of funds that can use this type of conversion.

If active ETFs hit in a big way, that could open the floodgates.

Read the prospectus for the proposed ETF here.

Seeour previous coverage of the issue here.

 

 

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