In an attempt to prevent front-running due to the disclosure rules associated with the actively managed exchange traded fund structure, Eaton Vance Management has filed with the Securities and Exchange Commission to offer “exchange traded managed funds” or ETMFs that would not disclose holdings daily.
According to the SEC filing, ETMFs would act as a new type of open-end fund that provides confidentiality of the current portfolio holdings while maintaining the cost and tax efficiencies and protections associated with ETFs.
ETMFs would trade on an exchange, with prices linked to the fund’s next-determined daily net asset value, or NAV. Essentially, the product allows a type of NAV-based trading, which was first conceived by Gary Gastineau, the principal at ETF Consultants.
The new product structure would help the firm prevent front runners from exploiting the strategies – the ETF structure requires daily disclosures, which could allow others to mimic the holdings and strategy. [Actively Managed ETFs]
“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,” according to an Eaton Vance note. “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.”
The firm will adapt existing Eaton Vance mutual funds into a suite of ETMFs under its Navigate Fund Sollutions LLC brand.
“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,” Stephen W. Clarke, President of Navigate Fund Solutions, said in a note. “Through use of in-kind redemptions, ETMFs can also achieve levels of tax efficiency similar to ETFs.”
Under the ETF structure, funds utilize a creation/redemption process to execute “in-kind” transactions that would exchange a basket of underlying component holdings for shares of ETFs, instead of selling out of a position and incurring a taxable event. [Creations & Redemptions]
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Max Chen contributed to this article.
Story updated to correct name of proposed Eaton Vance products.