Within less than 2 weeks after the all-visionary SEC blocked NYSE Arca from listing non-transparent, actively managed ETFs developed by ETF Industry icon BlackRock Inc., as well as those designed by upstart Issuer Precidian Investments (see MM edition Oct 23), this past Thursday, the same almighty securities regulator over-ruled itself and approved a different set of similarly non-transparent and actively-managed ETFs concocted by Eaton Vance, a competing ETF powerhouse and multi-billion asset manager within the $2tril + exchanged-traded fund marketplace.
Why was BlackRock “boxed out from under the board”, yet Eaton Vance victorious in the eyes of the SEC, the agency that is presumably mandated to protect retail investors from fund managers who prefer not to disclose their so-called ‘secret strategy sauce’? Its a head-scratcher for sure, particularly when the SEC’s turn-down ruling against BlackRock included the following statement:
“…the specific features proposed by the Applicants that would cause the proposed ETFs to operate without transparency fall far short of providing a suitable alternative to the arbitrage activity in ETF shares that is crucial to helping keep the market price of current ETF shares at or close to the NAV per share of the ETF. The Commission preliminarily believes that it is not in the public interest or consistent with the protection of investors or the purposes fairly intended by the policy and provisions of the Act to grant the exemptive relief under section 6(c) that the Applicants seek…”
According to ETF.com’s Dave Nadig’s explanation in his Nov 7 ETF.com blogpost, structure, not transparency is where the rubber meets the road that leads to the green light department at the SEC. Unlike the fund types in question, Nadig on the other hand, is fully-transparent when suggesting that deciphering these new products is no small challenge, even for long-time and well-educated users of ETF products.
“Where the Precidian structure uses a blind trust to act as a kind of information shield between the market and the fund itself to protect holdings information, the ETMF structure imagines something entirely different. ETMF shares are not traded like stocks, ETFs or ETNs; instead, they use a special-order type that books trades plus or minus an unknown end-of-day net asset value.
The structure, technically called “Nextshares,” theoretically brings many of the advantages of traditional ETFs. Because the shares are only bought and sold on the open market, like an ETF, they remove the shareholder servicing and 12b-1 distribution costs associated with traditional mutual funds. Because shares are created and redeemed through the ETF process, the tax advantages of ETFsare theoretically available to ETMFs as well.
That said, the NextShares product line will undoubtedly inspire a whole new slew of entrants to the ETF space, including and most likely, hedge fund operators seeking to grow assets more easily using an approach that conforms to the HF industry’s general marketing wisdom that, when it comes to information, less [information] is more, and if the SEC is going to make it easy to float shares to the public in otherwise secret trading strategies, well it all makes sense. Noted one industry member not authorized to divulge his name or firm, “Just like drivers are transfixed when passing a car wreck, or when TV viewers are more tuned into stories of murder and mayhem, in the world of investing, mystique sells. And to the credit of those who do have truly innovative strategies that only work when nobody knows how you do it, it is fair to say that divulging your holdings in a timely manner inevitably leads to trading market “gamers” who will copycat your process and eventually, upend your alpha capture strategy before your next block trade settles at your prime broker.”
That all sounds like a win for everyone. So what’s not to love?
To read Nadig’s most recent take on the topic, go directly to his blog post.