--A prospectus is set to be filed for a new type of ETF

--Nontransparent ETFs seen attracting mutual fund managers

--Critics argue that daily disclosure of holdings important

 
   By Murray Coleman

For years, fund companies have been trying to convince regulators to let exchange-traded funds relax daily reporting requirements. On Wednesday, the first proposed prospectus detailing how such a fund would work is expected to be filed with the Securities and Exchange Commission.

The filing by Precidian Investments, an investment advisory firm based in Bedminster, N.J., lays out the mechanics of how such a fund might work and specifics on its design, according to two fund managers familiar with the company's plans. Precidian has been talking to other providers about licensing its system.

"A lot of fund companies have made general requests for nontransparent ETFs, but this signals a significant step forward," says Samuel Lee, a Morningstar analyst.

Such industry leaders as BlackRock Inc. (BLK) and State Street Corp. (STT), Eaton Vance (EV) and T. Rowe Price (TROW) have also told the SEC they're interested in working through nontransparent ETFs.

The filing of a more definitive fund prospectus signals optimism by Precidian that it has received enough feedback from the SEC to advance its plans, analysts point out. "We're seeing progress in fund companies getting real feedback they can use to continue the process with the SEC," said Reggie Browne, head of ETF trading at Cantor Fitzgerald LP in New York, referring in general to the growing field of ETF competitors.

As manager of a 24-member ETF trading team, considered one of the industry's largest, Mr. Browne says he has been in discussions with the SEC on issues involving active ETFs.

A green light by the SEC is hardly assured, analysts note. For example, a plan being developed by Guggenheim Investments has been before the SEC in one form or another since 2006.

Critics of nontransparent ETFs argue that some managers are willing to manage active ETFs under current regulatory guidelines. Earlier this month, State Street launched a trio of ETFs with portfolios run by managers at MFS Investments, one of the U.S. mutual fund industry's senior competitors.

"The only people who really see a need for nontransparent ETFs are mutual fund companies. In a lot of cases, they're still smarting from a black eye with investors for not getting involved with this part of the market years ago," says Rick Ferri, founder of investment advisory firm Portfolio Solutions LLC in Troy, Mich., with $1.3 billion in assets.

Supporters argue that nontransparent ETFs would allow managers engaged in actively picking stocks and other assets to compete on a level playing field with traditional mutual funds. They point out that opaque bond markets in which trades are often negotiated over-the-counter have stirred most of the interest in active ETFs by well-known mutual fund managers.

To date, the ETF industry is overwhelmingly focused on passive investing that follows an index. Funds not linked to a benchmark represented 0.01% of the nearly $1.2 trillion in U.S.-listed stock ETF assets through last week, according to fund researcher Lipper.

By contrast, some 76% of stock mutual fund assets are actively managed. "Stock fund managers have largely been ignoring active ETFs," says Jeff Tjornehoj, a senior Lipper analyst.

The Precidian plan calls for a two-tiered process to shield trades in which a custodian acting as a middleman deals through a blind trust on behalf of large investors redeeming shares in-kind.

That would differ from current ETFs where institutional investors directly trade with fund providers. In the proposed framework set forth by Precidian, net asset values for each ETF would be published every 15 seconds - much like current ETFs. But those NAVs would not include the actual components. Individual securities would be disclosed on a quarterly basis, as they typically are for traditional mutual funds.

John Nester, a spokesman for the SEC, and Precidian officials declined to comment Tuesday on any public filings for active ETFs.

Precidian previously has told The Wall Street Journal it has been working with exchange operator NYSE Euronext (NYX) on nontransparent ETFs. But sponsors have also been dealing with the rival Nasdaq OMX Group Inc. (NDAQ), according to analysts.

Another step in the process, which some industry observers expect to take place soon after the Precidian filing, would be for the NYSE to file a set of proposed trading rules for the ETFs.

(Murray Coleman is a wealth management columnist who writes about investing in exchange-traded funds and mutual funds. He can be reached at murray.coleman@wsj.com.)

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