Merk ETF Seeks Derivatives Use

Forum Investment Advisors, the financial services firm backing the actively managed Merk Hard Currency ETF that is planned by renowned currency investor Axel Merk, filed updated regulatory paperwork making clear the fund intends at times to use derivatives as part of its investment strategy.

The updated "exemptive relief" filing is the latest example of an ETF firm circling back to the Securities and Exchange Commission for permission to use derivatives in active funds since the SEC ended its inquiry into the use of such financial instruments in ETFs . The commission didn't allow any new use of derivatives during the inquiry, which spanned from March 2010 to December of last year.

Merk put the Hard Currency ETF into registration at the SEC in March 2012, though the exemptive relief filing from Forum had not yet been approved, meaning the ETF itself couldn't go live. It's believed the whole regulatory process is near completion. Merk since updated the registration statement to change the proposed ticker of the fund to "MERK" from "HRD," according to the regulatory paperwork.

The Merk Hard Currency ETF will be the exchange-traded fund version of the Merk Hard Currency Fund ( MERKX ), which is also by managed by Merk, a German-born investment manager who is president of Palo Alto, Calif.-based Merk Investment LLC. The Merk Hard Currency Fund, his firm's biggest portfolio, is a nearly eight-year-old actively managed open-ended mutual fund with almost $600 million in assets.

The dollar-bearish ETF will normally invest 80 percent of its net assets in hard-currency-denominated investments from countries that appear conducive to long-term price stability, according to regulatory paperwork filed with the Securities and Exchange Commission last year. Its investments will be composed of high-quality short-term debt instruments, including sovereign debt and gold.

The new ETF, which will trade on the New York Stock Exchange's electronic trading platform Arca under the symbol "MERK," is being shepherded through the regulatory process by Portland, Maine-based Forum, which is in the process of obtaining "exemptive relief" to market active ETF strategies.

Exemptive relief grants ETF firms exception to sections of the Investment Act of 1940 and is just the first step in the path to launching ETFs. It often takes more than a year from the date of the initial filing for a company's first ETF to hit the market. Industry sources have indicated that the process is about completed.

Like Pimco's 'BOND'

Apart from relying on a third party's exemptive relief, Merk Investments LLC's plan looks like a repeat of Pimco's move to create the Pimco Total Return ETF (NYSEArca:BOND).

The ETF industry was abuzz as BOND came to market March 1, which provided a clue as to how Pimco would preserve the cache of its $288 billion Total Return Fund, the world's biggest mutual fund.

While Merk's currency fund is considerably smaller than the Total Return Fund, its move and Pimco's are the clearest signal yet of how the numerous mutual fund companies that are seeking regulatory permission to market ETFs will approach the ETF market.

In other words, emphasizing the star quality of investment managers like Bill Gross or Axel Merk is likely to be a big feature of large mutual fund companies' future ETF plans.

Pimco hasn't yet sought to gain approval for derivatives use in its ETFs, a move that's been widely expected for some time considering Bill Gross uses such instrument in the mutual fund version of the Total Return portfolio.

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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.

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