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SEC Opens Door For ETFs Of ETFs

The Securities and Exchange Commission has approved a request from Barclays Global Investors to construct exchange-traded funds that invest in other ETFs, clearing the way for other ETF providers to begin launching their own offerings. BGI plans to launch a lineup of iShares target-date retirement funds in the next few weeks that will use the structure. Paul Justice, ETF strategist at Morningstar, said the approval benefits investors and expects to see more firms launch ETFs of ETFs. “It further removes the individual investor from the issue of rebalancing and we think that’s good for investors who are long-term focused,” he said.

The move will also make it easier for exchange-traded fund sponsors to do creations and redemptions, said John McGuire, partner at Morgan, Lewis & Bockius. Previously, ETFs had to buy blocks of actual securities within an index the ETF was designed to track. For example, if a firm wanted to create an emerging markets ETF that included investments in Singapore they are now allowed have a Singapore-focused ETF as an underlying investment. “It’s easier to buy one ETF that invests in those securities, rather than having to buy the 13 or so securities in Singapore that you may need,” said McGuire. In its no action request letter, BGI also noted that an ETF of ETFs structure could increase asset levels in the underlying ETFs and create economies of scale for those funds.

A BGI spokesman did not return calls for comment.

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