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.