“We are a big believer that ETFs will play a bigger and bigger role in bonds,” Fink said. One reason is that managing individual bonds “is still incredibly cumbersome.”
Early Entrants
State Street won approval to start the nation’s first ETF in the early 1990s, then iShares got the go-ahead in 1996, when it was still part of British bank Barclays Plc. With the industry in its infancy, such early entrants obtained the SEC’s blessing to run ETFs in a more flexible manner than subsequent applicants.
Unlike mutual funds, ETFs trade throughout the day on stock exchanges. Each ETF obtains the securities for its portfolio by trading with stock and bond dealers that it has designated as a so-called authorized participant. In exchange for delivering baskets of securities to the fund, the participant receives shares of the ETF it can hold or sell on the open market.
When it comes to fixed-income ETFs, the early applicants can simply look at the inventory of bonds held by their authorized participants and pluck out the ones that best help them track the appropriate index. But ETFs established after 2012 can only accept baskets from dealers that precisely reflect their benchmark -- a virtual impossibility for bond funds that track fixed-income indexes composed of hundreds of different securities -- or they must take cash from the dealers and then go find the bonds they need.
“It has always been a mystery to me why the SEC clamped down on the ability to do custom baskets,” said Peter Shea, an ETF specialist at law firm K&L Gates LLP. “People who got ETF exemptive relief before 2012 don’t have that straitjacket.”
Goldman and the others are requesting the same latitude accorded to those that obtained approval before 2012. Authorized participants for Goldman’s ETFs “may receive or deliver” a creation basket “that does not correspond pro rata to the identities of the portfolio holdings of the fund,” according to language the firm included in its application filed on Oct. 2. The others added similar wording.
This article was provided by Bloomberg News.