Update #2: The Bear Stearns Current Yield Fund (YYY) began trading on the American Stock Exchange this morning, making it the winner of the race to launch the first actively managed ETF. Hats off to the folks at Bear, who have obviously endured a lot in the past few weeks.

Update: Matt Hougan of Index Universe reported today that, in fact, Bear Stearns isn't going to launch its fund after all. The listing has been shelved indefinitely in light of recent events. So, the race to list the first actively-managed ETF is on again. 

Matt Hougan of Index Universe riffs further on the subject of actively managed ETFs in his blog today. I think he's on the money. Short-term, this is a bigger deal for the providers than for investors. But it's a net-positive for investors on the whole.

Here are a few additional thoughts on actively-managed ETFs based on some conversations I had recently with some folks in the industry...

• Bear Stearns' actively-managed bond ETF, which is slated to launch on Tuesday, will be the first to market (update: provided that Bear Stearns doesn't, um, implode between now and then). PowerShares will launch soon thereafter, making its actively managed stock ETFs the first of their kind, but not the absolute first. So, the long wait for actively managed ETFs ends on a fittingly anticlimactic note with the launch of a full-blown active...ultra-short bond fund. I'm not sure that going 30-days long the benchmark quite comports with the popular notion of the active manager as a swashbuckler who scours the market for mispricings. But it'll do.
• This structure--in which the manager provides daily portfolio disclosure and investors/market-makers are essentially blind intra-day--is about as far as the SEC is going to be willing to go. There's been some talk that actively-managed ETFs could take the form of a 'shadow portfolio' that resembles, but doesn't replicate, what an active manager actually owns. The idea is that you provide full transparency to investors and the specialists/authorized participants who make the market in ETFs by disclosing the shadow portfolio. Yet, because the basket of securities in question would merely serve as a proxy for the manager's actual portfolio, that transparency wouldn't kneecap the manager in the process. Or so the theory goes. In any event, the individuals I spoke with--who have been close to the approval process--thought that approach would remain a non-starter with the SEC.
• What's striking about the aforementioned actively-managed ETF structure is its resemblance to the existing ETF structure. Daily portfolio disclosure, same arbitrage mechanism, etc. For all intents and purposes, the structure is identical to a passively-managed ETF's, except the actively managed ETFs won't track an index. In other words, the years-long sojourn to come up with a suitable structure has brought the industry and SEC full-circle to almost exactly the place they started--the familiar ETF structure that's in wide use already.
• Not surprisingly, the sources I spoke to pretty much confirmed that the reason this initial crop of ETFs targets such liquid and, in some cases, homogeneous market segments (low-duration bonds, mega-cap stocks, etc.) is to come up with a structure that's satisfactory to market-makers and portfolio managers alike. That's generally consistent with our initial take a few weeks ago. Doesn't mean these funds can't succeed (and, in fact, mega-cap looks very attractive to our eyes at the moment). Just makes it harder.
• I also got a better feel for why some of these ETFs' mandates are more restrictive than others. For instance, the PowerShares actively-managed ETFs that are slated to be run by AER will limit that manager to just a few trades per week, all of which must take place on the same day of the week. By contrast, PowerShares' other actively-managed ETFs (and, indeed, Bear Stearns' forthcoming ETF) give the managers more-or-less free rein. The upshot is that because these strategies were drawn-up at different points in time, they reflect what was known about the SEC's posture at those times. Thus, the AER strategies presumably were devised some time ago, before it became apparent that the SEC would be comfortable with a more free-wheeling approach, even if it meant that investors and market-makers would be blind to any changes intra-day. (Incidentally, several talking-heads have suggested that this initial crop of actively-managed ETFs aren't full-blown active. That's incorrect. AER certaintly seems to have one hand tied behind its back given its restrictive trading guidelines. But the other two PowerShares ETFs and the Bear Stearns fund aren't so-constrained. So hopefully we can get past this whole 'it's not really active' hairsplitting. It's active.)
• One of the biggest challenges for ETF providers will be finding managers willing to participate in this type of structure. Many successful managers, who are hauling around billions in assets, are understandably reluctant to tip their hand to the market by disclosing their portfolio holdings on a daily basis. Paradoxically, ETF providers would want to partner with these very sorts of managers, as they're more familiar to, and popular with, investors and, thus, more likely to attract a following in an actively-managed ETF structure. So the trick is figuring out how to induce these managers to run money with daily disclosure. The folks I spoke to described a few approaches that might work. For instance, having the manager run a variant of its most successful strategy. Or, trying to devise an approach/strategy in which the manager can complete any trade in a single day, thereby obviating the risk presented by front-runners (in other words, by the time the front-runner tries to step in front, or out-of-the-way, of a trade, the transaction is already complete...remember, the market is blind intra-day). Obviously, the optimal situation is a proven, successful manager who, for whatever reason, isn't hauling around a huge pile of assets (think: ex-Mutual Shares manager David Winters or ex-Janus skipper David Corkins). In that situation, you could bring an actively-managed ETF on-line without having to worry much about front-runners and quickly build a following for the product based on the manager's reputation.
• Though these solutions might make some managers more comfortable with the ETF structure, one can't help but wonder if the compromise ends-up reducing the manager's effectiveness in the process. After all, in at least some of these cases, you'd potentially be asking a manager to run a strategy that they've never employed before. That's not to say that managers can't actually believe in the efficacy of any 'carve-out' strategy they agree to run in an actively managed ETF structure. But, generally speaking, it's a bit worrisome when you're asking a manager to stray from his/her bread and butter approach.

The Bear Stearns fund (ticker: YYY) is scheduled to make its debut on Tues., Mar. 18, by the way.