Fidelity Submits Proposal to Retrofit Closed-End Funds as ETFs

  • Firm’s application calls for new exchange-traded active funds
  • Fidelity proposal would eliminate daily disclosure of holdings

Fidelity Investments is taking a new tack in an industry push for actively managed exchange-traded funds. 

The firm’s approach, outlined Thursday in a filing with the U.S. Securities and Exchange Commission, would be modeled on a closed-end fund, a type of fund that issues shares that trade on an exchange but isn’t required to disclose holdings daily. Fidelity is seeking to modify this structure in a way that would keep the fund’s share price and net asset value more closely linked than is the case with current closed-end funds.

Fidelity’s proposal is the latest in a series of efforts by fund companies to get around an SEC requirement that ETFs disclose their holdings daily, so that their shares can be priced efficiently by market makers and broker-dealers. Fund companies say the requirement makes it difficult to offer actively managed funds, because competitors would be able to copy them. Active fund managers have proposed a number of techniques to meet the pricing information requirements without giving away their holdings, but so far the SEC has only approved one such application, from Eaton Vance Corp.

Closed-end funds sell their shares through an initial public offering. The shares then trade in the secondary market, often at a sharp discount to the net asset value of the fund’s underlying holdings.

Fidelity would offer what it calls exchange-traded active funds. It would hold weekly tender offers in which it would offer to buy back the shares of these funds at net asset value, hopefully eliminating the discounts that have bedeviled closed-end funds.

Fidelity would also employ what the firm calls tracking baskets to give traders enough pricing information to make markets for the funds during the day and to create and redeem shares with the fund itself. The Fidelity funds would post information on their holdings on a monthly basis.

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