Fund managers pull nearly 130 single-stock ETF applications

Three fund managers have withdrawn applications for almost 130 single-stock exchange traded funds prompting suggestions that US regulators had privately told them the ETFs would not be approved.

Kelly Intelligence, Roundhill Investments and Tema Global had filed with the Securities and Exchange Commission to create ETFs linked to the share price of a slate of non-US companies, such as Saudi Aramco, Volkswagen and Tencent.

However all three issuers have now abandoned their filings with minimal public comment.

“I am completely unsurprised that they’ve been pulled and would not be surprised if it was in direct response to SEC staff comments,” said Dave Nadig, financial futurist at VettaFi.

The SEC declined to comment, as did Kelly, Roundhill and Tema.

Kelly’s amended filing said it “has elected not to proceed with the registration process”, while Roundhill’s update said it “has determined not to proceed with the offerings of these series at this time”.

More cryptically still, Tema simply updated its filing by crossing out references to its proposed ETFs.

The apparent pushback comes despite the SEC having approved leveraged and inverse single-stock ETFs, even as it expressed concerns over their suitability for retail investors, in July. Those products were based on US-listed companies.

In contrast, the proposed new products would not have employed leverage, and simply aimed to improve retail access to foreign securities, given that many brokers, such as Robinhood, do not provide this service.

Similar products have already been approved in Europe, where both plain vanilla and leveraged and inverse single-stock exchange traded products based on US and Chinese companies are commonplace.

The SEC has stepped up its warnings about the danger of leveraged single-stock ETFs of late.

“There could be some signalling that [these filings] are taking it a step too far,” said Bryan Armour, director of passive strategies research, North America, at Morningstar.

“When [single-stock ETFs] were first allowed by the SEC we saw a couple of prominent figures step up and say that isn’t how the ETF Rule [which streamlines the approval process] is supposed to work, and these ETFs are not appropriate for ETF advisers to recommend to clients.”

Nadig described the now withdrawn ETFs as “fake ADRs”, in that they would act similarly to the American depositary receipts that some overseas companies issue in order to facilitate trading in US markets.

“Creating ‘fake ADRs’ was always a bad idea,” he said. “There are reasons firms like Saudi Aramco haven’t listed ADRs. The IPO [initial public offering] of Aramco was less than 0.5 per cent retail, and there are strict limits on foreign ownership in any case. Listing an ADR would have required the firm, and country, to give up significant capital controls.”

“The ‘dodge’ of just investing through a single-stock ETF wouldn’t have offered US investors any of the protections an actual US listing or ADR would have, and had the potential to create liquidity mismatches somewhere down the road, if you imagine one of these being very successful,” Nadig added.

Indeed, one person familiar with the situation, who requested anonymity, suggested that the SEC’s concerns were partly around examples such as Aramco or Chinese companies such as Alibaba, which may have their ADRs delisted from New York’s stock exchanges under new US accounting laws.

If that came to pass, the regulator is believed to have concerns that those Chinese companies could bypass this restriction simply by listing a single-stock ETF in New York that held its own stock — if the precedent for such vehicles has been set.

The source did not believe this necessarily sounded the death knell for single-stock overseas ETFs. Instead, he thought the process could follow that for bitcoin futures ETFs, where the early applicants were asked to withdraw their filings for a three to four-month consultation period before being invited to reapply, this time with success.

“The SEC didn’t think of this loophole in the regulations and they want to think through the implications,” he said.

However, Armour drew parallels with “physical” bitcoin ETFs, which the SEC has still not approved because the underlying trading takes place on venues it does not regulate.

“As we saw with physical bitcoin ETFs, the SEC is not a fan of allowing ETFs with underlying assets in unregulated areas that are out of their control,” Armour said. “There are a lot of issues right now in China. The regulatory landscape has changed significantly.

“It’s a Pandora’s box: once you have allowed an ETF you can’t put it back in a box,” he added.

Nadig was also dismissive. “My crystal ball [tells me] that we won’t see these fake ADR products launch,” he concluded.

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