Eaton Vance Files For New Active 'ETMFs'

March 28, 2013

Eaton Vance finally submits its proposal for a new nontransparent active fund structure to the SEC.

Eaton Vance, the Boston-based fund company known for its family of closed-end funds, filed regulatory paperwork with the Securities and Exchange Commission to gain permission to offer a new kind of active ETF that would allow fund managers to keep the contents of the exchange-traded portfolio non-transparent—as is the case with active open-end mutual funds.

The new structure, long in the works and based on patents Eaton Vance purchased from longtime ETF industry figure Gary Gastineau, will be called exchange-traded managed funds, or ETMFs, according to a press release the company put out on today.

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,” which Gastineau helped conceptualize. In NAV-based trading, prices would vary from NAV by a market-determined premium or discount, which could at times be zero, the press release said.

“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 press release said.

Eaton Vance’s proposed ETMFs using NAV-based trading is but one of the dreams coursing through the ETF industry to make non-transparent active ETFs a reality. Both BlackRock and Precidian Investments are proposing a non-transparent ETF structure using blind trusts for all creations and redemptions, to preserve the fund manager’s “secret sauce” he or she creates on the elusive road to alpha.

All these proposals would mark a radical departure from the transparency that is at the very center of what so many advisors and investors find so compelling about ETFs. That’s not to say that active ETFs don’t exist. They do, but have to disclose their portfolio holdings at the end of each trading session.

As far as that goes, a number of industry sources are somewhat skeptical that, firstly, the Securities Exchange Commission will cede the centrality of the concept of transparency in the world of ETFs. Secondly, that even if they ETMFs do see the light of day, investors and advisors accustomed to how cheap index ETFs have become, aren’t likely to flock to them—especially without long track records to recommend them.

To put all these cross-currents in perspective, active mutual funds must reveal their holdings quarterly—and often with a lag of up to 60 days on top of that.

“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,” Eaton Vance Chairman and Chief Executive Officer Thomas Faust, Jr. said in the prepared statement.


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