Lack of understanding

The concerns around actively managed exchange traded products have arisen because fund managers of actively managed listed funds make trading profits by buying and selling units, even though only the fund manager has timely information about the value of the assets in its portfolio.

In an extensive report on ETFs and ETPs in 2018 ASIC said it had concerns that investors did not understand the "profit generated from internal market making", which it said could "lead to inherent conflicts and unequal treatment among different groups of investors".

ASIC cited an example of an unfavourably low bid price for a member seeking to sell units in the fund.

ASX backs ASIC

"We consider that it is important for issuers to have appropriate frameworks around internal market making to manage conflicts, even when the amount of profit earned from the internal market making is small relative to the size of the fund," the ASIC report said.

The ASX said it supported the approach from ASIC in calling for the halt of new listings.

The move by regulators highlights yet another issue that fund managers seeking to raise money via listed funds are encountering.


While there has been an explosion of listed investment companies and listed investment trusts, there have been industry and regulatory concerns about commissions paid to brokers to place these products with clients,

LICs and LITs have also come under scrutiny because units often trade at large discounts to underlying asset values, increasing the cost of selling out of a position.

The use of active ETPs was touted as a solution to the problems that arise through the issue of LICs and LITs, as market makers are hired to ensure investors can buy and sell units at close to the underlying value of the assets.

The market making process is managed by the responsible entity, which hires an agent to buy and sell units on the open market. The agent charges a flat fee for providing its market making services but trading profits accrue to the fund.

Most exchange traded funds track specific indices that are publicly available, allowing external market makers to easily trade the units.

Active ETP issuers, however, have opted to use internal market makers, rather than external ones so they do not have to reveal their portfolio positions.

But regulators are concerned about transparency, because buyers and sellers do not know the underlying value of the actively managed portfolio, as fund managers change their positions on a daily, weekly or monthly basis.

Some of Australia's biggest fund managers have used active ETPs to raise money. They include Magellan, which was the pioneer of active ETFs when it listed the market's first in 2015.


Other fund managers such as Platinum and Fidelity have since followed up with the issuance of active ETP products.

Industry sources said there might be concerns because as some listed funds had grown in size and become more actively traded, the ''bid to offer'' spread had not contracted.

That means investors are not benefiting from the increased liquidity in the form of a reduction in transaction costs, raising concerns about the process.