Disclosure Doubts Remain On Active ETFS

 The key to the approvals was a degree of portfolio transparency that managers will find very hard to live with, according to ETF officials.

The disclosure conditions which Bear Stearns Asset Management, PowerShares Capital Management, Barclays Global Investors and WisdomTree Investments agreed to used identical language. They would mean revealing a portfolio's holdings at the market opening the next day. That much disclosure might tempt free riders and front runners. "A really good manager is not going to want to disclose the portfolio because then his value decreases," said George Simon, partner at Foley & Lardner, who helped guide Bear Stearns through the approvals process.

Free riding and front running are mainly a threat to equity funds and it is notable that of the four ETFs with approval, only one, from PowerShares, will invest in stocks. The Bear Stearns ETF will invest in short-term debt while the BGI and WisdomTree offerings will invest in foreign currency instruments.

What proponents of active ETFs would like the SEC to approve is some variation of a so-called club portfolio, which would involve rapid disclosure of a list of securities similar to, but not the same as, the contents of the actual portfolio. The SEC today receives ETF disclosures every 15 seconds. But the agency is fending off club portfolio proposals because it says the numbers delivered every 15 seconds would not equal the real value of the ETF's holdings. The industry's hope is that ever-improving technology will find a way to meet the SEC's disclosure demand while still keeping portfolio contents secret.

"I think there will be a lot more [actively managed ETFs]--this is just the beginning.," said Tim Meyer, ETF product manager at Rydex Investments. "Different types of proposals will go to the SEC, with less transparency, in order to take advantage of a truly active strategy."

As usual with approvals, the SEC is giving outsiders who wish to raise objections to the approvals 25 days to do so. Officials at PowerShares, Bear Stearns, WisdomTree and BGI did not return calls.

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--Stan Wilson & Sam Mamudi