JP Morgan To Nix Derivatives In Active ETFs

November 09, 2010

J.P. Morgan joins a growing number of firms that won’t use derivatives in their ETF strategies.

J.P. Morgan, the massive Wall Street financial firm that bought Bear Sterns, amended its original filing to launch a line of actively managed ETFs to specify that it won’t use derivatives in its strategies.

The company first filed paperwork with the Securities and Exchange Commission in March for index-based ETFs as well as actively managed funds. In its latest amendment, the company went into more details on what it plans to do on the active front.

In the filing, J.P. Morgan, which is looking into equities and fixed income both domestic and global for its active funds, said its first fund would invest in a broadly diversified portfolio of large-cap U.S. equities, some 300 names in all, across various sectors of the economy.

It specifically said it won’t include options, futures contracts or swap agreements in the portfolios, according to the filing. The SEC said in March it was reviewing the use of derivatives in all new and pending exemptive relief filings, prompting a number of companies with ETFs in the works to eliminate derivatives from their plans.

From Provider To Sponsor

J.P. Morgan has long been a large service provider to other ETF companies, providing custody and related services to more than 100 third-party ETFs. Its foray into ETF sponsorship thus represents a new business-development initiative.

Now J.P Morgan is hoping to join a growing number of financial firms and mutual fund providers, such as Goldman Sachs and T. Rowe Price, who are laying the groundwork to offer their own ETFs.

J.P. Morgan also clarified in its amended filing that, in what pertains to international strategies, the company might rely on depositary receipts it deems liquid enough rather than holding the underlying foreign security if  it sees that as a more viable alternative.

J.P. Morgan first started its application process in March, requesting exemptive relief to launch ETFs. Exemptive relief filings grant the ETF firms exception to sections of the Investment Act of 1940, and are just the first step in the path to launching ETFs. It often takes at least six to 12 months from the date of the initial filing for a company’s first ETF to hit the market.


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