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US ETF industry to get more active

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Relaxation of disclosure regulations in the United States could see the Exchange Traded Fund (ETF) market, especially actively managed ETFs, expand rapidly in the US and in Australia, according to locally-based global equities manager Antipodes Partners.

Last week the United States’ Securities and Exchange Commission provided conditional approval to allow active ETFs in the US to trade without being required to disclose what they hold on a daily basis, a model similar to what is in place with Australia’s active ETF industry.

“The fact that the US-based Precidian Investments was given approval to trade its active ETF without publicly disclosing changes to its holding on a daily basis is a major step forward in the development and growth of the US active ETF market,” says Chris Meyer, Director of Listed Products at Pinnacle Investment Management – which includes global equities manager Antipodes Partners, that recently launched one of the few active ETFs in Australia.

“It’s the first fund manager in the US to win approval for a non-transparent ETF and market regulators are expected to approve trading of more active ETFs without the asset manager having to disclose what it owns on a daily basis, as active ETFs have had to do to date.

“The move could potentially spur many more fund managers to offer more active ETFs while allowing them to  protect their intellectual property of the securities they own by not revealing their portfolio changes to market on a daily basis.”

Active ETFs in the US will still have to disclose daily holdings, but only to a new subset of professional trader called ‘authorised participant representatives’. The public will receive the portfolio holdings on a quarterly basis, much the same as Australia.

“The decision is considered a win for active stock pickers who do not want to reveal their holdings for fear front runners and others may seek to capitalise on predicting their next move,” says Myer.

He expects this to lead to the development and growth of active ETFs in the US, as well as Australia and elsewhere around the world.

“As the active ETF market grows in the US, increased education on what active ETFs are and the benefits they offer for investors should help stimulate interest in, and adoption of active ETFs in Australia. That bodes well for the industry’s growth,” says Meyer.

The SEC, which had twice before declined to give a green light to Precidian’s non-transparent active ETFs due to concerns about whether the funds’ prices would track their holdings, announced it would approve the proposal unless its commissioners decide to order a hearing.

Many US active fund managers had been unwilling to bring active ETFs to market as they did not want to expose their trades to the public immediately. “If this is the breakthrough the market has been waiting for then it could result in a raft of active asset managers in the US bringing new active ETFs to market,” says Meyer.

In the US, ETFs represent in excess of 20 per cent of the broader mutual fund industry. The US accounts for almost 70 per cent of the global USD4.8 trillion ETF market indicating how important a change like this could be for the adoption of active ETFs globally.

By comparison in Australia, the ETF market is at about 7 per cent of the retail managed fund industry and was valued around USD30 billion as at end 2018.

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