(ETFdb) In March 2010, the SEC began a review of the use of derivatives by ETFs, specifically actively-managed and leveraged funds. Norm Champ, director of the SEC’s Division of Investment Management, stated that the use and complexity of derivatives have grown significantly over the past two decades and have “given rise to many interpretive and policy issues under the 1940 Act.”
But two years later, the SEC finally announced last week that fund companies can seek regulatory permission to include derivatives in actively-managed ETFs. There are, however, explicit stipulations that fund managers must adhere to:
1. The ETF’s board must periodically review and approve the ETF’s use of derivatives and how the ETF’s investment advisor assesses and manages risk with respect to the ETF’s use of derivatives.
2. The ETF’s disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission and staff guidance.
The SEC stressed that it will continuously review this issue, but in regards to decisions concerning the use of derivatives by leveraged exchange-traded funds, they are still hesitant to grant permission.
“Because of concerns regarding leveraged ETFs, however, we continue not to support exemptive relief for such ETFs,” Champ said.
What Does This Mean For ETF Investors?
Derivative use has been a touchy subject for many investors, as these powerful instruments have led to some huge financial disasters. On the other hand, they have also provided lucrative opportunities for those with the knowledge and in-depth understanding of how exactly these products work.
But will using derivatives in actively-managed ETFs do more good or harm for investors? Unfortunately, the most reasonable answer is that only time will tell. Below we outline the top five actively-managed funds that investors may want to follow:
Total Return Exchange-Traded Fund (BOND): 0.55% expense ratio; $3.9 billion AUM
Enhanced Short Maturity Strategy Fund (MINT): 0.35% expense ratio; $2.1 billion AUM