October 16, 2017
The Honorable Jay Clayton
Securities and Exchange, Commission
100 F Street, NE
Washington, DC 20549
Dear Chair Clayton,
I am writing to you in response to the SECs request for comment regarding the proposed rule change by NYSE Arca (File No. SR-NYSEArca-2017-36, Release No. 34-80553) to list and trade shares of the Royce Pennsylvania ETF; Royce Premier ETF; and Royce Total Return ETF under Proposed NYSE Arca Equities Rule 8.900. I strongly support these proposed changes.
Over the past three decades, ETFs have proven themselves to be invaluable to investors and managers alike, providing a complementary, flexible, liquid, popular, exchange-traded alternative to mutual funds. However, investors in actively managed funds have not been offered the flexibility and advantages of being able to invest through ETFs. Providing a liquid and robust ETF access point for investors looking to avail themselves of professional active management is essential and long overdue in my opinion.
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 Index and Sector funds provide me with choices of ETFs and mutual funds, I have been precluded from accessing actively managed funds in an ETF vehicle. As such, I strongly support the idea of offering actively managed funds to investors as ETFs- this is a brilliant and long-awaited concept, and one I have commented in support of previously. Live intraday pricing of the underlying portfolio will enable me to see how the fund’s 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 makers to provide liquidity for the product (with the ability to arbitrage price discrepancies by creating and redeeming shares in the portfolio, as with all other existing ETFs) and allows me to purchase or sell my shares at the time and price of my own choosing. 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 great advantage over the traditional mutual fund structure of executing your entry or exit at an unknown and unpredictable closing price. Furthermore, the ability to place retail orders intraday, 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 specific order types, rather than being held hostage to the closing price of a mutual fund.
I believe actively managed ETFs also provide significant benefits to the fund manager ultimately translating into better 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 don’t want the surprise of unexpected distributions (many investors are unaware of those risks and suffer accordingly). 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 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 and institutional investors, market markets, and fund management companies. Unlike index ETFs, 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 now understand about the proposed ETFs here, there is a simple and uncomplicated way to provide all retail and professional investors with a level playing field in terms of the manager’s strategy, universe of securities, and intraday price feeds based upon the value of the underlying portfolio. The use of an AP Representative to allow the authorized participants and market makers to create, redeem, and arbitrage the portfolio of the actively managed fund without being able to see the individual share holdings, is an elegant solution. It is a very effective way to balance the manager’s perfectly understandable need for confidentiality (in order to avoid front running and strategy replication) and make use of the well-understood arbitrage mechanism that has made ETFs liquid and reliable products by ensuring little divergence between the market price and value of the fund’s holdings.
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 Royce ETFs (and future ETFs using this structure). Allowing retail investors the choice of 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.
Andrew M. Gross, Jr