BlackRock's Bold ETF Play

By Billy Fisher | September 09, 2011 AAA

BlackRock (NYSE:BLK) is looking to break into unchartered waters in the ETF world. The company's request to the SEC to launch 13 actively managed ETFs, which do not have to disclose their daily holdings, could have major implications for both the ETF and mutual fund industries. It is hard to predict the likelihood of a positive outcome for BlackRock in this undertaking, but it's a bold bet nevertheless. (To learn more on ETFs, check out An Inside Look At ETF Construction.)

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Struggling for Appeal
Actively managed ETFs are a novel concept in that they couple the tax benefits of an ETF with the skill of a money manager. For the most part, though, actively managed ETFs have yet to make a significant impact in the ETF world.

PIMCO has one of the largest actively managed ETFs with its PIMCO Enhanced Short Maturity Strategy Fund (Nasdaq:MINT), which invests in short-term investment grade debt securities. The fund has a little more than $1.4 billion in total net assets.

WisdomTree also has a few actively managed ETFs that have picked up significant asset bases. The WisdomTree Emerging Markets Local Debt Fund (NYSE:ELD), the WisdomTree Dreyfus Chinese Yuan Fund (NYSE:CYB) and the WisdomTree Dreyfus Emergency Currency Fund (NYSE:CEW) have $1.44 billion, $566.3 million and $573.5 million, respectively.

Seeking an Edge
Most of the money in the ETF arena, though, is centered on passive products. And because ETFs have to disclose their holdings daily, there has not been a mass rush by investors or providers into active ETFs. Probably the biggest edge that mutual funds have over ETFs at the moment is that they do not have to disclose their holdings daily.

If BlackRock is to prevail in its quest to launch ETFs that do not have to disclose their holdings daily, the mutual fund industry could be in big trouble. Right now it is difficult for most actively managed ETFs to gain a large asset base since investors can cherry pick the top trades that the managers of these funds make. If the disclosure requirement were to go away, I believe actively managed funds would begin to see some serious inflows.

The Bottom Line
The outcome of BlackRock's request should be closely watched, as it has the potential to set a major precedent for actively managed ETFs. A win here would make it difficult for a mutual fund to sell itself over an ETF that has a lower expense ratio, tax advantages and similar disclosure requirements. This development is very intriguing and could ultimately prove to be a game changer for ETF investors. (For more on passive and active ETFs, read Active Vs. Passive ETF Investing.)

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