Non-transparent active exchange-traded funds moved a step closer in the US last week after the Securities and Exchange Commission approved a request by Nasdaq to adopt a new rule governing the listing and trading of a new fund structure called the exchange-traded managed fund (ETMF).
Thomas E. Faust Jr, Chairman and Chief Executive Officer of Eaton Vance.
The new open-end fund structure is effectively a hybrid between conventional actively managed mutual funds and ETFs.
ETMFs would list on an exchange like an ETF and trade using a new trading protocol called “NAV-based trading”, but, similar to traditional mutual funds, would not need to disclose holdings on a daily basis.
In a related action, the SEC also issued notice of its intent to grant Eaton Vance, the investment management firm which devised the new structure and owns the intellectual property, and related parties an exemption from certain provisions of the Investment Company Act of 1940, as amended, to permit the offering of such funds.
Eaton Vance plans to commercialize the structure through its Navigate Fund Solutions affiliate under the recently unveiled NextShares brand. Prior to the launch of NextShares ETMFs, however, the SEC must declare effective the registration statements of individual funds and approve fund-specific listing and trading rules.
“The approval of Nasdaq’s rule change request for NextShares caps a pivotal two days in the development of NextShares,” said Thomas E. Faust Jr, Chairman and Chief Executive Officer of Eaton Vance. “We look forward to continuing our collaboration with Nasdaq to bring NextShares to market.”
A key feature of the NextShares ETMF structure is the innovative NAV-based trading protocol. In NAV-based trading, all orders to buy and sell shares are executed at NAV plus or minus a trading cost (for example, -$0.01, +$0.02) that is determined in the market. All bids and offers for shares are quoted as a premium or discount to NAV, and trading prices may be above, at or below NAV. But because ETMFs will provide market makers with opportunities to earn reliable, low-risk profits without intraday hedging of their fund positions, ETMFs can be expected to trade at prices that are consistently close to NAV in the absence of daily portfolio holdings disclosure. And because the trading cost to buy and sell ETMFs (premium or discount to NAV) is always explicitly stated, ETMFs will provide investors with transparency of entry and exit costs unparalleled among exchange-traded products.
Sponsors of actively managed funds have to date largely avoided introducing their leading strategies as 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 holdings disclosures, ETMFs can potentially enable investors to access a broad range of active strategies in a structure that provides the performance and tax advantages of an exchange-traded fund.