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Newfangled ETFs from Eaton Vance Would Deter Frontrunning


Eaton Vance plans to adapt existing mutual fund products into active exchange traded managed funds as a way to sidestep the daily disclosure rules associated with ETFs and protect their secret sauce.

The money manager has filed with the Securities and Exchange Commission to create the new ETMF structure, and if approved, the firm will launch 15 to 20 ETMFs that mirror existing mutual funds, reports Mariana Lemann for Ignites. [Eaton Vance Proposes New Active ETF Structure]

“The primary advantage of ETMFs is that its structure is consistent with how most active managers like to manage money. This would not require the same level of transparency of holdings,” Thomas Faust, chairman and CEO of Eaton Vance, said in the article. “Anything you can do in a mutual fund you can do in an ETMF.”

However, the ETMF structure will still come with low costs and tax efficiencies that ETFs are known for. ETMFs will have comparable expense ratios to institutional shares of active mutual funds, minus 10 to 25 basis points.

“We expect them to be cheaper in terms of expense ratios than the lowest-cost actively managed mutual funds, but not as low cost as passive strategies,” Faust said.

The major difference between ETFs and ETMFs will be in the way they trade. ETMFs will be linked to a fund’s net asset value, which is determined at the end of each day – this method of “NAV-based trading” was first developed by Gary Gastineau, the principal at ETF Consultants.

Under NAV-based trading, a process similar to how existing transactions in mutual fund shares take place, investors would be able to send in orders intra-day based on a proxy price that represents the NAV, which is calculated at 4pm of each day. However, this will concentrate most of the day’s liquidity around the final end-of-day price.

“Active managers have until now been a bit skittish about having to show their hand on a daily basis,” Ben Johnson, director of passive fund research at Morningstar, said in the article. “This structure would serve to alleviate concerns about daily portfolio disclosure.”

Eaton Vance believes ETMFs will be a large success, and the firm is already trying to license the technology to other active fund providers through its Naviage Fund Solutions subsidiary.

For more information on the ETF industry, visit our current affairs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.