April 5, 2016
The Honorable Mary Jo White
Chair
Securities and Exchange, Commission
100 F Street, NE
Washington, DC 20549
Dear Chair White,
I am writing to you in response to the SECs request for comment regarding the proposed rule change by NYSE Arca (34-77117) to permit the listing and trading of managed portfolio shares and to permit the listing and trading of shares of fifteen issues of the Precidian ETFs Trust.
I have been an active retail investor for 30 years and use both mutual funds and ETFs (as well as individual stocks) in my savings and investments. Over the last ten years more of my investment activity has gravitated toward ETFs and away from mutual funds. ETFs offer excellent liquidity, complete flexibility (I can enter and exit investments at the time of my choosing during the trading day), intraday pricing transparency (I can always see how my ETF is performing relative to the market or in reaction to significant news) and allow me to match the realization of my gains and losses to my actual entry and exit dates for the investment. These advantages have made ETFs very important and useful instruments to retail investors like me.
While for Index and Sector funds I can choose between ETFs and mutual funds, I have been limited in choice for actively managed funds. I strongly support the idea to offer actively managed funds to investors as ETFs- this is a brilliant and long-awaited concept. Live intraday pricing of the underlying portfolio will enable me to see how the funds portfolio value is performing at all times (as opposed to mutual funds where I can only see this after it is too late to take any action), enables market markets to provide liquidity for the product (with the ability to arbitrage price discrepancies by creating and redeeming shares in the portfolio, as with existing ETFs) and allows me to purchase or sell my shares at the time and price of my own choosing. With the wider intraday trading ranges we have seen recently, the ability to put in limit buy orders below the market (or limit sell orders above the market) is critical- this can easily provide a 1% (or more) advantage versus executing at an unknown closing price and the ability to place retail orders provides some stability above and below the market intraday rather than cramming all activity into the closing window. If I have decided to limit my loss on a mutual fund investment to around 5% or I wish to target a profitable return on a fund investment of 10%, an actively managed ETF would allow me to try to match those targets more closely using orders, rather than having to wait to see the closing price of a mutual fund and then hope the same price level is available the next day.
I believe actively managed ETFs also provide significant benefits to the fund manager and to fund performance. Capital gain and loss distributions and tax effects have an impact on fund manager behavior (they make seek to avoid taking gains or do transactions only for tax purposes). An actively managed ETF would allow the fund manager to make the investment decisions they believe in, without being distorted by tax consequences. As an investor, I am cautious about purchasing mutual funds during the last several months of the year because I dont want the surprise of unexpected distributions. I would not have this hesitation with an actively managed ETF. This purpose of an actively managed fund is to give the investor access to the skills and style of the fund manager- and I think an actively managed ETF would do this in the purest form and be beneficial to retail investors like me.
ETFs are a proven product with a tried, tested and well-established perfect arbitrage mechanism (creation and redemption of the underlying portfolio shares) for liquidity and NAV tracking. They are an important and well-accepted tool amongst retail investors and market markets and fund management companies. Actively managed funds have the additional wrinkle of not wanting to publicly disclose holdings except through quarterly filings, and I suppose this is what has prevented the evolution of ETFs into actively managed funds to date. From what I have read about the proposed Precidian ETFs, they have come up with a way to provide all retail and professional investors with a level playing field in terms of intraday price feeds on the value of the underlying portfolio, and through a trusted agent allow the market makers to create and redeem (and hold) the portfolio of the actively managed fund without being able to see the individual share holdings. This is an elegant solution and seems to be a very effective way to use the well-understood, perfect arbitrage mechanism that has made ETFs liquid and reliable products, allow the market makers to control execution of their fund portfolios and yet still protect the confidentiality of the fund manager.
Overall, I believe it is time to bring the significant benefits of ETFs to the actively managed fund sector and I support the NYSE Arca rule change and the listing and trading of the Precidian ETFs Trusts. Allowing retail investors the choose from both ETFs and mutual funds when selecting an actively managed fund is the right decision, just as it was for index and sector funds. Thank you for your consideration.
Sincerely,
Andrew M. Gross, Jr