An ETF That Hides Its Secret Sauce Is Poised For Regulator's Nod

Ted

FYI: An exchange-traded fund that doesn’t have to reveal its assets is poised to get the regulator’s blessing after a more than four-year wait.

The U.S. Securities and Exchange Commission plans to issue an order granting Precidian Funds permission for the new type of ETF, the watchdog said in a notice Monday. Market participants can still request a hearing through May 3, the regulator said; if granted, that could potentially delay or derail the final approval. The funds also need permission to start trading from another division of the SEC.

The decision is a huge win for stock pickers who have long pushed back against a requirement that funds publish their investing positions daily.
Regards,
Ted
https://www.bloomberg.com//news/articles/2019-04-08/an-etf-that-hides-its-secret-sauce-is-poised-for-regulator-s-nod?srnd=markets-vp

LLJB

What happens when they make a mistake? Providing an indicative value every second is admirable but I have to imagine is not easy for it to be perfect every second of every day. Who bears the responsibility for those mistakes and any losses that result if and when they happen?

msf

Personally, I think transparency is overrated (how many people read their fund's quarterly disclosures, let alone check the holdings day by day?).

Nevertheless, I'm unclear on what your concern is. Currently, no funds, not even actively managed ETFs, disclose their holdings more than daily. Authorized participant (AP) trading is based on portfolio composition files and indicative values, not on knowing exactly what's in the fund. So even now, ISTM AP trades are based on imperfect indicative values.

As far as passively managed ETFs go, some don't even disclose their holdings except monthly (and even then, with a lag). Again, what APs are buying and selling is based on portfolio composition files (baskets) which do not match what is in the fund (especially for index funds that use sampling to track their benchmark index and may be using the baskets to tweak their holdings).

Maybe (actually I'm sure) I need to think this through some more. Still, I've always felt that transparency is not the big deal that ETF proponents make it out to be.

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Mark

Maybe with a (private) hedge fund you just hand over your money and let the manager(s) do their thing but with a publicly traded fund isn't there some expectation of just what you as an individual investor are investing in?

I agree with msf in that most folks never bother to look or possibly even care about the holdings but I think that a public fund should be required to show some semblance of transparency.

msf

There is. Quarterly disclosures plus lag time. It's called window dressing

Mark

I'm aware of that. I just wasn't aware that ETF's have a different set of rules. FWIW I don't put a whole lot of stock in the daily list anyway but I do monitor quarterly changes.

msf

I was just trying to be flippant.

Index ETFs have the same set of rules as "other" mutual funds, i.e. just quarterly disclosures, though most disclose daily, and as linked to above, Vanguard discloses monthly.

Actively managed ETFs are required to disclose holdings daily. The theory is that this helps APs know what's in the portfolio. I still don't get how this once a day disclosure helps, because they're buying/selling intraday what's listed in a portfolio composition file that doesn't exactly match a fund's holdings anyway. But that's the theory.

What's appears to be new is that in lieu of posting holdings daily, actively managed ETFs merely need post their indicative value more frequently than before - each second instead of each quarter minute.

Current (not new) SEC rules: https://www.sec.gov/investor/alerts/etfs.pdf

Many ETFs will disclose to the public their holdings every day, in addition to the quarterly disclosure required for all mutual funds. ...

Actively managed ETFs are required to publish their holdings daily. Because there is no index that can serve as a point of reference for an actively managed fund’s holdings, publishing the specific holdings allows the arbitrage mechanism to function.