ETFs Get Active

And if it's possible to figure out what the fund manager bought or sold, it would then be possible to front-run the fund, which would put the ETF at a disadvantage.

"There's a tension between what fund managers want to do, which is to at least keep what they're doing quiet until they finish doing it, and [the] SEC's desire for complete transparency," says Simon.

The Amex's Baker says that the ETF issuers are balking at managed funds because of the disclosure issues, and that regulators are "perfectly willing to consider" them.

However, he said that in the not-too-distant future, we'll see managed portfolios that disclose holdings in a generic sense using a proxy, or tracking, portfolio.

This tracking portfolio will mimic the intraday movement of the fund itself, but can't be used to reverse engineer the holdings of the fund, says Baker.

"The proxy portfolio may or may not contain the names that are in the actual [actively managed ETF]... It will be made up of securities that are weighted to mimic the performance of the ETF," he says.

This proxy portfolio exists to give the market makers and specialists enough information to fairly price the ETF. Baker says that ETFs such as these will be in the pipeline soon and likely will appear on a case-by-case basis.

Higher Fees

With active management, it's likely that the low underlying fees that have made ETFs so attractive will go up, but ETFs will still retain a tax advantage relative to mutual funds.

When a fund manager sells a large position, there could be millions of dollars in capital gains. Investors have to pay taxes on those gains.

But Simon notes that because of the way ETFs are structured, they will not be subject to the same tax liabilities if the holdings within an ETF change.

"The advantage tax-wise should offset some of the higher fees that will probably be charged," says Simon.

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