Goldman Sachs Group Inc. and Pacific Investment Management Co. are leading a push for equal rights when it comes to running index funds tied to the global bond market.
Pimco and Goldman are joined by OppenheimerFunds and Nuveen Fund Advisors in asking the U.S. Securities and Exchange Commission for more flexibility in constructing exchange-traded funds that track indexes. Approval would put them on the same footing as three ETF pioneers -- Vanguard Group, BlackRock Inc.’s iShares unit and State Street Corp.
While stocks comprise almost 80 percent of ETF assets, bonds are the industry’s next frontier for growth, according to BlackRock Chief Executive Officer Larry Fink. Because bonds are harder to locate and trade than stocks, money managers are asking the SEC to relax constraints it imposed on index-based ETFs as they became the fastest-growing vehicle for investing in equities.
“The real impetus for this has come from the debt people,” said Kathleen Moriarty, an attorney at Chapman & Cutler LLP who helped obtain approval in the early 1990s for the first exchange-traded fund in the U.S., the SPDR S&P 500 ETF Trust. Managing an index ETF “becomes more difficult with bonds, especially if you are talking about anything other than Treasury bonds.”
BlackRock, Goldman and Oppenheimer, all based in New York, declined to comment, as did Newport Beach, California-based Pimco and Nuveen of Chicago.
SEC Changes
This could be the time to persuade the SEC to loosen its restrictions. Jay Clayton, appointed by President Donald Trump to head the SEC earlier this year, spent his legal career representing Wall Street firms -- including Goldman -- and is expected to cut back on regulations that he views as stifling job growth and capital formation. In September, Clayton appointed Dalia Blass, an ETF specialist at the law firm Ropes & Gray LLP, to head the SEC’s division of investment management, which oversees the fund industry.
Edward Baer, an attorney in the San Francisco office of Ropes & Gray, is representing all four firms that filed the revised ETF applications. Baer didn’t return calls seeking comment.
ETFs in the U.S. hold about $3.2 trillion of assets, including roughly $2.5 trillion of equities and $566 billion of debt securities, according to data compiled by Bloomberg.
The latter figure equals just 1 percent of global bonds outstanding, but Fink predicted in an Oct. 3 television interview with Bloomberg News that ETFs will become 15 percent of the fixed-income market in five years.