AdvisorShares Rethinks Derivatives Use In Debt ETF

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AdvisorShares, a purveyor of actively managed ETFs, decided to abandon the use of derivatives in a high-yield debt ETF it has had in the works since February, in a move related to increased regulatory scrutiny of derivatives use in ETFs.

The amended filing for its Peritus High Yield ETF (NYSEArca:HYLD), which will invest in senior and subordinated corporate debt and loans, no longer stated the company might add "exchange-traded financial and stock index futures and options" to the portfolio mix, as the first filing stipulated. In its original registration statement, AdvisorShares had spelled out such derivatives would be used to hedge against interest rate fluctuations.

AdvisorShares' decision to nix derivatives from an ETF is the second time in as many weeks that an ETF firm has altered plans since the Securities and Exchange Commission decided in March to review the use of the instruments in ETFs. Last month, Claymore Securities said in a filing with the SEC that it would no longer use derivatives in any actively managed funds it rolls out.

The SEC put on hold the approval of any pending or future "exemptive relief" filings that companies make to request permission to offer actively managed or leveraged ETFs that contemplate the use of derivatives, such as options, in their investment strategies.

Lisle, Ill.-based Claymore amended an actual exemptive relief filing, while Maryland-based AdvisorShares is changing a fund that's already in registration-the latter development a clear sign that the SEC's decision is affecting ETF launch plans more widely than the language in the Commission's March press release suggested.

"Given the current focus on derivatives, and our desire to get this out in a timely manner, we removed the portfolio manager's ability to use these [derivatives] as part of the investment strategy," AdvisorShares Chief Executive Officer Noah Hamman told IndexUniverse in an interview today. "This was our choice, and not at the direction of the SEC."

The Peritus High Yield ETF, the first planned product that's part of an AdvisorShares partnership with Peritus Asset Management announced on Feb. 18, will cost investors 1.35 percent a year, the new filing said. The company didn't say when the fund might launch.

Stricter SEC Rules?

While no new regulations have yet emerged from the SEC review, Hamman said in a recent interview with IndexUniverse that he anticipates that stricter rules, if any, would only apply to over-the-counter derivatives that trade with less efficiency and transparency than those traded on exchanges.

Still, it could take time until the SEC fully revamps the way it handles ETF derivatives regulation, and companies planning leveraged, inverse and actively managed funds are feeling the immediate burden of the review process, whatever its ultimate outcome.

"It has definitely affected us because it has slowed things down for us," Hamman said in the recent interview. "We've had a dialogue with the SEC about what we are using and what we are doing. So, while their ongoing review of the use of derivatives and swaps in ETFs impacted us, it hasn't changed any of our plans to launch new products."

Its planned debt ETF, HYLD, will have 40 to 60 holdings in multiple industries that have attractive valuations in the secondary credit market. The fund won't be bound by any maturity limitations.

Peritus, a Santa Barbara, Calif.-based registered investment adviser, specializes in high-yield debt chosen with a view on cash flow as opposed to ratings. Peritus will develop all AdvisorShares ETFs in the future, the companies said in a statement.

AdvisorShares serves as the adviser for the fund. The Maryland-based company also manages the DENT Tactical ETF (NYSEArca:DENT) and it plans to launch the WCM/BNY Mellon Focused Growth ADR ETF (NYSEArca:AADR) later this month.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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