The Securities and Exchange Commission's solicitation of perspectives on the state of exchange-traded products produced a fruitful, if predictable, bounty of views from the asset management industry.
The 60-day comment period, which ended Monday, attracted 29 comments, 16 of which arrived on the last day.
While the letters reflected general support for more and better investor education efforts, there were also some strategic efforts by companies to protect their turf.
For example, State Street Global Advisors, the third-largest ETF provider with $431.8 billion in ETF assets, argued that ETFs are efficient, transparent and provide good price discovery.
In SSgA's eight-page letter, Joshua Weinberg, vice president and managing counsel, wrote, “In the most volatile markets over the last 15 years, ETFs have continued to trade effectively. We have observed that ETF trading volumes increased sharply in September 2001 and in late 2008 as investors looked to ETFs for their key attributes of transparency and liquidity.”
The Vanguard Group, the second-largest ETF provider with $432.7 billion in ETF assets, described ETFs as highly regulated, effective and efficient investment products.
In its letter, signed by Heidi Stam, managing director and general counsel, Vanguard argued against full portfolio disclosure as potentially harmful to funds.
Disclosing a complete list of portfolio holdings “would be particularly concerning for index funds during specific events impacting a target index, such as publicly announced corporate actions and index reconstitutions,” Ms. Stam wrote.
“In such instances, market participants may use a fund's list of portfolio holdings to reverse engineer its proprietary portfolio management and trading techniques, anticipate the amount of a particular security the fund must buy or sell, and profit by transacting in the security prior to the fund's transactions,” she continued. “This would harm the fund and its shareholders by causing the fund to pay more, or receive less, or securities in which it transacts.”
In its 51-page request for comment on ETPs, the SEC emphasized the increased complexity of the products and the accelerating pace of growth since the first ETF began trading in January 1993.
Between 2006 and 2013, the SEC reported, the number of ETPs listed and traded rose by an average of 160 per year. That compares to an average annual increase of 17 between 1993 and 2005.
Through December, the SEC counted more than $2 trillion invested in 1,664 ETPs.
Along with the growth has come complexity that continues to raise concerns among regulators, financial advisers and investors.
“Most mainstream ETFs function exactly as they were designed to, but others, most often in the commodity space, can expose inherent limitations that the average person doesn't understand,” said Paul Schatz, president of Heritage Capital.
Then there is the whole riddle of fixed-income ETFs: While such ETFs have full daily liquidity, the underlying assets have much less liquidity.
The SEC's confusion and frustration were evident earlier this month when it issued a Wells notice to Pacific Investment Management Co. regarding the pricing of securities in the PIMCO Total Return Active ETF.
“Pricing fixed-income instruments is not the same as pricing shares of Google and IBM,” Mr. Schatz said. “These are all part of the growing pains, and the free market will eventually fix these things, but I will give the SEC credit for demanding the education of consumers, even though it's an uphill battle.”
In its 27-page comment letter, the Investment Company Institute said the “arbitraging in bond ETF shares is, at most, a minor contributor to and certainly not a primary driver of, price changes in the underlying bond markets.”
The ICI letter, signed by David Blass, the organization's general counsel, detailed the trading activity in government, corporate, high-yield and municipal bond ETFs during the 2013 taper tantrum compared to more normal periods and found that investors were not hindered during the recent period of market stress.