The Nasdaq OMX Group has filed a proposed rule change with the US Securities and Exchange Commission (SEC) to permit the listing and trading of exchange-traded managed funds (ETMFs).
The filing complements the previously announced application for exemptive relief to permit the offering of ETMFs as filed by Eaton Vance Management on 27 March 2013 and most recently amended on 23 January 2014.
ETMFs are a proposed new type of open-end fund designed to bring the performance and tax advantages of exchange-traded funds (ETFs) to active investment strategies, while maintaining the confidentiality of current portfolio trading information.
As described in the proposed rule change, ETMFs would trade on The Nasdaq Stock Market at prices directly linked to the fund’s next-determined daily net asset value (NAV), using a new trading protocol called “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 fund managers have to date largely avoided introducing their leading strategies as transparent ETFs because the required daily holdings disclosures can facilitate front-running of portfolio trades and enable other investors to replicate the fund’s portfolio positioning and exploit its research insights. By removing the requirement for daily portfolio transparency, ETMFs can potentially enable investors to access a broad range of proven 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. Aspects of ETMFs and NAV-based trading are protected intellectual property subject to issued and pending US patents.
“Today’s action by Nasdaq OMX to file for a rule change permitting the listing and trading of ETMFs is a further milestone in seeking regulatory approval for ETMFs,” says Stephen W Clarke, president of Navigate. “In collaboration with our partners at Nasdaq OMX, we continue advancing this innovative fund structure toward approval and launch.”
