10/24/2014 Financial Advisor IQ - SEC’s “No” on Active ETFs Is Good News for Advisors

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SEC’s “No” on Active ETFs Is Good News forAdvisors0 Comments Post Comment By Murray Coleman October 24, 2014

The mutual-fund industry has long pined to gain a bigger foothold in the white-hot ETF market. Earlier this week, itsefforts took a body blow when the SEC said it would reject proposals by BlackRock and Precidian Investments toissue actively managed ETFs without disclosing their holdings every day.

Although mutual-fund companies are expected to keep pushing for change, the regulator’s decision could keep theETF market solidly within the passive-management universe. And that’s not necessarily a bad thing, according toRon Vinder, a UBS FA in New York, whose practice manages $4 billion. “As a fee-based advisor who demandstransparency for my clients, I see no great need for any type of actively managed ETFs,” he says.

The BlackRock proposal asked the SEC to approve a system thatwould basically allow big institutions to create new ETFs with cashrather than actual securities. That, among other things, would cloakholdings of actual stocks from the daily disclosure requirements thatnormally apply to ETFs. Precidian’s proposal was similar. Such“non-transparent” active ETFs would trade throughout the day, justlike their passively managed counterparts — and would have asimilar advantage over mutual funds in terms of flexibility andliquidity.

But for active managers, disclosing their holdings daily wouldamount to giving away trade secrets. As a result, just 0.91% of the$1.9 trillion in U.S. ETF assets are actively managed, according toMorningstar. And only 14% of those actively managed ETF assetsare in stock portfolios. Since bonds are a less liquid market,transparency isn’t such a big deal for bond managers.

“The fund industry’s clamoring for the SEC to lift the veil of transparency for active ETFs in order to open thefloodgates to stock ETFs,” says Morningstar analyst Michael Rawson. But he thinks it’s a long shot.

And even if the SEC had ruled in BlackRock’s favor, he doubts more than a trickle of assets would wind up goinginto non-transparent ETFs. “Besides being untested in the market, advisors have been strong adopters of ETFs,”Rawson says. “They’re a key reason why ETF assets have been growing so strongly in the U.S. And by and large, wejust don’t see strong demand by advisors and their clients to pay up for actively managed ETFs — whether they’retransparent or not.”

UBS advisor Vinder likes explaining to clients the advantages of building portfolios exclusively around passive ETFs.Instead of paying high fees to outside managers, his six-member team builds on UBS research to analyze long-markettrends and set allocations. And his practice has plenty of internal resources to tailor investment strategies to eachclient. “We like index-based ETFs because they’re the most tax-efficient and cost-effective way to create highlypersonalized and unique portfolios for each client,” he says.

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10/24/2014 Financial Advisor IQ - SEC’s “No” on Active ETFs Is Good News for Advisors

http://financialadvisoriq.com/c/996193/100343/active_etfs_good_news_advisors?referrer_module=featuredContent&module_order=0 3/6

Sam Katzman

The SEC’s BlackRock ruling probably won’t end the fund companies’ push for non-transparent ETFs, says SamKatzman, chief investment officer at New York-based Constellation Wealth Advisors, which manages $6.2 billion.BlackRock and Precidian can try tweaking their proposals in response to regulators’ concerns, he points out. But hethinks the industry will have a tough time persuading the SEC that its doubts are unfounded.

For clients looking to take advantage of experienced managers with long track records of beating their peers, Katzmansays he’ll keep recommending either separately managed accounts or mutual funds. “Investors already have plenty ofchoices if they want active management in their portfolios,” he says. “I don’t see any great advantage in letting ETFsbehave more like mutual funds.”

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