J.P. Morgan Joins Push for Nontransparent, Active ETFs
23 January 2017 - 04:29AM
Dow Jones News
By Asjylyn Loder and Sarah Krouse
J.P. Morgan Chase & Co. is joining a long line of asset
managers backing a new type of exchange-traded fund that mimics
active strategies but keeps its investments secret.
The concept, designed by Precidian Investments, has so far been
rejected by the U.S. Securities and Exchange Commission despite
support from industry giants including BlackRock Inc., American
Funds owner Capital Group Cos., and Legg Mason Inc., which owns a
minority stake in Precidian. J.P. Morgan is expected to announce on
Monday that it plans to license Precidian's ActiveShares model.
Precidian's ETFs would disclose stockholdings on a delay rather
than daily, as traditional ETFs do. If approved, the funds could
open a lucrative new business line for banks and asset managers
whose investors are clamoring for ETFs, which trade on public
exchanges just like company stocks.
The approval of the Precidian approach -- dubbed
"nontransparent" active ETFs in the industry -- would pave the way
for firms like J.P. Morgan, Invesco Ltd. and BlackRock to repackage
their mutual funds and separately managed accounts into ETFs
without giving away their proprietary trading strategies to
potential copycats.
"We hear from advisers that they want our best capabilities in
ETF vehicles," said Bob Deutsch, head of ETFs for J.P. Morgan's
asset-management unit. "It will be no less transparent than a
traditional mutual fund, and there won't be the risk of
front-running or reverse engineering."
The Precidian case has been closely watched by asset managers,
who have seen ETFs grow faster than mutual funds, driven by the tax
advantages of ETFs and the lackluster performance of many actively
managed funds.
Precidian's approval could put a huge swath of investor capital
within reach of the U.S. ETF industry, which has swelled to more
than $2.4 trillion but is still dwarfed by the $16.2 trillion
sitting in U.S. mutual funds, according to the Investment Company
Institute, a Washington trade group.
"There's a ton of money in active products that will find a
better home in ETFs," said Dave Nadig, chief executive of ETF.com,
an industry publication owned by Bats Global Markets Inc.
The SEC has been skeptical of allowing nontransparent products
because it would be difficult to assess the real-time value of an
ETF's stockholdings if investors don't know what the fund owns.
Precidian would post the real-time value of its holdings on
exchanges. New share creations and redemptions would be routed
through custodians who know what the fund is buying and selling but
keep the trades specifics confidential, similar to how some mutual
funds are handled today.
An SEC spokesman declined to comment. Precidian has been working
with SEC staff to allay the regulator's concerns, said Dan McCabe,
Precidian's CEO.
"It's giving active managers the same flexibility to offer ETFs
that passive investing has today," said Mr. McCabe, who pointed out
that Precidian ETFs would be no less transparent than many mutual
funds are today.
The proliferation of new ETFs in recent years has made it hard
for latecomers to set themselves apart from giants like BlackRock
and Vanguard Group, who have been engaged in a price war that has
made their funds among the cheapest in the industry. J.P. Morgan's
two-year-old ETF business has garnered just $1 billion in assets
while its mutual funds have $265 billion.
Even if Precidian wins approval, it isn't clear that investors
will flock to active ETFs because they have consistently lagged
behind their cheaper, passive competitors, said Mr. Nadig. Passive
U.S.-listed equity ETFs returned 29% in the past year at an average
cost of 0.62% while actively managed funds returned 19% at a cost
of 0.92%, according to XTF.com, a research and advisory group.
(END) Dow Jones Newswires
January 22, 2017 12:14 ET (17:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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