Asset management giant Vanguard on Wednesday filed for exemptive relief with the Securities and Exchange Commission to create an entirely new line of transparent actively managed exchange-traded funds.
In it’s filing, the Valley Forge, Pa.-based company is seeking approval to create stand-alone ETFs. That differs from a similar exemptive relief filing from March 2014 for transparent ETFs where Vanguard sought approval to offer an ETF share class of existing actively managed stock or bond funds.
Vanguard currently offers 70 passive ETFs listed in the U.S., all of which are market cap-weighted products based on its existing mutual funds.
Before it entered the ETF space in 2001, Vanguard decided against creating stand-alone products like those of iShares or State Street and instead sought to leverage the mutual funds it already had by creating a separate ETF share class for those funds. It reasoned that it would be more cost-efficient from both trading and management perspectives to offer funds across a multi-share class structure.
It created a patented method of taking a mutual fund and creating an alternate ETF share class that trades on an exchange, which some analysts said posed possible legal problems for mutual fund companies when it came to translating their traditional open-end active portfolios into accompanying ETFs.
The much-anticipated rollout of active ETFs has been a slow-motion process of much talk and little action, with some companies filing for exemptive relief and the SEC being slow to provide a thumbs up for those plans. Another hang-up has been fears that exposing active mutual fund portfolios to daily disclosure in an ETF needed for intraday trading runs the risk of front running by professional traders such as hedge funds.
That has spawned creative strategies to thwart front running by keeping holdings non-transparent, such as the exchange-traded mutual fund structure from NextShares, which are active funds owned by Eaton Vance that began trading in February. These hybrid products have the low fees and intraday trading of ETFs, but like mutual funds are priced at net asset value just once daily after the market closes. The funds don’t have to disclose their holdings on a daily basis.
And just last week, Fidelity Investments filed with the SEC for approval of non-transparent actively managed ETFs based on a modified closed-end fund structure called exchange-traded active funds.
Elsewhere, Precidian Investments’ is still awaiting the okay from the SEC for its thrice-filed application for its non-transparent, actively managed ActiveShares ETFs.
In Vanguard’s case, filing for transparent active ETFs doesn’t mean it’s comfortable letting it all hang out regarding portfolio holdings. “We’d consider active ETFs that follow certain strategies that can accommodate for daily portfolio holdings disclosure, such as high-capacity, model-driven strategies,” says spokesperson Katie Hirt.