Securities and Exchange Commission Staff Permit Exchange-Traded Funds to Track Their Indexes by Investing in Other Exchange-Traded Funds

The SEC staff recently issued a no-action letter permitting certain exchange-traded funds (Upper Funds) to meet their investment objectives by investing all or part of their assets in other exchange-traded funds (Underlying Funds), instead of investing directly in the component securities of the Upper Funds’ indexes, subject to the conditions outlined below. As discussed in greater detail in the no-action letter, the Upper Funds generally track broad market indexes composed of many securities, while the Underlying Funds track indexes each of which may be a narrow segment of a broader market index composed of fewer securities. In many cases, a broad market index may be composed of the same components as the aggregate of two or more narrow segment indexes.

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