Active ETFs get boost from SEC

By Caroline Cakebread | December 12, 2012 | Last updated on December 12, 2012
2 min read

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In the eyes of many regulators, ETFs are seen as interlopers in the investment world.

They’re often blamed for all forms of market distortions, malfunctions and outright crashes. But there are signs the ice is melting, as regulators are slowly warming up to exchange-traded products.

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It all started a few weeks ago when the Government of China approved the launch of two yuan-denominated ETFs that track Hong Kong stocks. They let mainland investors trade shares in the former British colony for the first time.

And now, the U.S. Securities and Exchange Commission has approved the use of derivatives for active ETFs, which rely on manager skill to outperform rather than on passive underlying indices.

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The news came in a speech by Norm Champ, the SEC’s director of the investment management division. Champ was clear there’d still be tight restrictions on derivatives, and firmly stated the SEC isn’t changing its position in regard to leveraged and inverse ETFs.

All the same, it’s good news for the ETF industry and puts it on a more level playing field with active fund managers already using derivatives.

Star bond manager Bill Gross, co-chief investment officer with PIMCO, has used them in his fixed income fund for years. It’s called the Total Return Fund, one of the largest mutual funds in the world.

PIMCO has also successfully launched an ETF version of this flagship fund, which hasn’t been able to rely on derivatives in tracking the fund. The PIMCO Total Return ETF (BOND) has returned 12% since inception, compared with 7.4% for Gross’s mutual fund.

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With derivatives back on the table for at least some ETF providers, this could open up the space for active ETFs to grow further and for new players to enter the market. And, at the very least, it shows the products are gaining a bit more acceptance in the eyes of the policy-makers and regulators.

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Caroline Cakebread