Eaton Vance Management has filed an application with the US Securities and Exchange Commission seeking exemptive relief to permit the offering of exchange-traded managed funds (ETMFs).
ETMFs are a proposed new type of open-end fund designed to bring the cost and tax efficiencies and shareholder protections of the exchange-traded fund (ETF) structure to active investment strategies, while maintaining the confidentiality of current portfolio trading information.
ETMFs would trade on an exchange at prices directly linked to the fund’s next-determined daily net asset value (NAV), using what is referred to as “NAV-based trading.” In NAV-based trading, prices would vary from NAV by a market-determined premium or discount, which may be zero. Because ETMFs would provide market makers with opportunities to earn reliable arbitrage profits without intraday hedging of their inventory positions, they can be expected to trade at consistently tight spreads to NAV in the absence of full holdings disclosure.
Active managers have to date largely avoided introducing their strategies as transparent ETFs because the required daily holdings disclosures can facilitate front-running of portfolio trades and enable copycat investors to replicate a fund’s portfolio positioning. By removing the requirement for daily portfolio transparency, ETMFs can enable investors to access a broad range of active strategies through a vehicle that provides the investor benefits of an exchange-traded fund.
Eaton Vance seeks to launch a family of ETMFs that mirror existing Eaton Vance mutual funds and to license the underlying technology to other fund groups through its subsidiary Navigate Fund Solutions. Aspects of ETMFs and NAV-based trading are protected intellectual property subject to issued and pending US patents. NAV-based trading was conceived by longtime ETF thought-leader Gary Gastineau and the related intellectual property was acquired by Eaton Vance in 2010. Eaton Vance’s partners in commercialising ETMFs include The Nasdaq Stock Market and BNY Mellon.
“Navigate Fund Solutions and Eaton Vance expect ETMFs to reliably generate 50 basis points or more of improved annual returns versus similar mutual funds across a range of strategies, reflecting lower operating expenses and reduced flow-related trading costs in the ETMF structure,” says Stephen W Clarke, president of Navigate Fund Solutions. “Through use of in-kind redemptions, ETMFs can also achieve levels of tax efficiency similar to ETFs.”
“Eaton Vance views ETMFs as a significant progression in the evolution of actively managed funds to a lower-cost, better-performing and more shareholder-protective structure,” says Thomas E Faust, Jr, chairman and chief executive officer of Eaton Vance. “We see ETMFs as having the potential to transform the delivery of active fund strategies in the same way that ETFs have changed how index fund strategies are bought and sold.”
