On July 27, 2026, the Securities and Exchange Commission (SEC) staff issued no-action relief to an investment industry trade association, permitting exchange-traded funds (ETFs) to temporarily exceed their 25% industry concentration limits due solely to market movements rather than portfolio management decisions.
The relief addresses a practical issue that can arise when appreciation in securities from a particular industry causes an ETF’s exposure to that industry to exceed the limits established under its concentration policy. Because ETF share creations occur through authorized participants that deliver creation baskets to the fund, advisers generally cannot control the timing of creation orders. Without relief, those creations could further increase exposure to an already overweighted industry.
How the Relief Works
Under the SEC staff’s position, an ETF experiencing a passive concentration exceedance may continue to process creation orders in certain circumstances that would result in continued exceedance of the concentration limit. This includes situations in which the fund:
- Accepts a pro rata creation basket containing securities from the affected “over-concentrated” industry.
- Accepts cash and uses the proceeds to purchase securities in the “over-concentrated” industry up to the applicable pro rata amount.
- Accepts a non-pro rata creation basket that does not increase the industry’s weighting beyond what would result from a pro rata creation basket.
Why the SEC Granted Relief
The trade association argued that, without relief, ETFs could be forced to alter basket construction practices in ways that may disadvantage shareholders or seek shareholder approval to modify fundamental concentration policies.
The SEC staff agreed that allowing routine creation activity to continue in these limited circumstances would not raise the concerns underlying fund concentration policies, provided the exceedance results solely from external market forces rather than investment decisions.
Key Takeaways for ETF Sponsors
The no-action position applies to both index-based and actively managed ETFs. The relief provides operational certainty for ETF sponsors and advisers by permitting normal creation activity to continue during temporary, market-driven concentration exceedances while preserving existing shareholder protections and concentration policy requirements.
Our Investment Funds Group is available to help with any questions concerning this recent no-action relief.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
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