New horizons for ETFs

Article

New horizons for ETFs

Regulatory change opens doors for all exchange-traded funds including active nontransparent ETFs

With a sudden shift in the regulatory exchange-traded fund (ETF) landscape, investment managers now have the opportunity to more easily launch ETFs against a backdrop of industry pressures. First, a long-awaited change and opportunity for the ETF industry is finally here with the approval of Rule 6c-11 (the ETF Rule) by the Securities and Exchange Commission (SEC). The ETF Rule allows asset managers to bring certain ETFs to market without the cost and delay of obtaining exemptive relief, as those ETFs will now be able to operate within the scope of the Investment Company Act of 1940 (1940 Act). Since 1992, the SEC has issued more than 300 exemptive orders for ETFs to operate under the 1940 Act, according to data from the SEC. This new rule creates a more level operational playing field for the majority of ETFs. ETF sponsors will be able to get their products to market quicker and more efficiently, and as ETFs tend to be more transparent and have lower costs than traditional mutual funds, this rule is likely to have a significant impact on product creation in the investment management industry.

Executive Summary

With the passing of the ETF Rule by the SEC and approval of several firms’ active shares licenses over the past year, the SEC has signaled their focus on the growing interest in active nontransparent ETFs. The tax efficiency of ETFs, combined with the active management strategies of mutual funds, make this new product offering an attractive one to investors. For these reasons, active nontransparent ETFs will likely be a source for growth for several asset managers in 2020 through market expansion and product development. In this article, we will cover key takeaways of the final rule, opportunities for active nontransparent ETFs, and next steps for the industry.

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Performance magazine issue 32, May 2020

Performance is a triannual digest, dedicated to investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.

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