Eaton Vance ETMF A Step Forward, But ...

November 06, 2014

Sometimes I’m wrong. But I’m still a skeptic.

Eaton Vance announced tonight that their non-transparent ETF structure, which they call “Exchange Traded Mutual Funds,” has received a Notice of Intent from the Securities and Exchange Commission to grant exemptive relief.

That’s a big deal. The competing nontransparent structure from Precidian, which has had the backing of many large players like BlackRock, State Street and American Funds, has had some big setbacks. So in the race to get a nontransparent active structure into the market, this would seem like a major setback to Precidian and its crew, and a huge win for the ETMF structure.

Where the Precidian structure uses a blind trust to act as a kind of information shield between the market and the fund itself to protect holdings information, the ETMF structure imagines something entirely different. ETMF shares are not traded like stocks, ETFs or ETNs; instead, they use a special-order type that books trades plus or minus an unknown end-of-day net asset value.

The structure, technically called “Nextshares,” theoretically brings many of the advantages of traditional ETFs. Because the shares are only bought and sold on the open market, like an ETF, they remove the shareholder servicing and 12b-1 distribution costs associated with traditional mutual funds. Because shares are created and redeemed through the ETF process, the tax advantages of ETFsare theoretically available to ETMFs as well.

That all sounds like a win for everyone. So what’s not to love?

Nothing’s Perfect

To buy shares of an ETMF, you have to learn a whole new type of trading that has not actually been approved yet (that’s Eaton Vance’s next hurdle). You don’t buy a share of XYZ for $100, with some knowledge about whether that’s above or below some fair value.

Instead, you buy XYZ for “NAV Plus $1” or “NAV Minus $1.” If you put that trade in at 3:59 p.m., you can be pretty sure what your final price will be, but what if you put that trade in at 10 a.m.?  Between the time you place your trade and the end of the day, all sorts of things can happen, and you get what you get.

Is this fair or unfair? Neither, really. After all, if you by the SPDR S&P 500 ETF (SPY | A-96) at 10 a.m., you’re subject to the whims of the market for the rest of the day too. But I do worry that it’s shifting the burden from the market to the investor. If the market’s in a volatile crisis, how is the average investor supposed to know whether or not -$1 to NAV is a good deal?

More information will surely emerge as the Eaton Vance/NextShares structure moves through the next steps in the process—convincing exchanges and brokerage firms to change how they trade. But for the moment, we’re pleased that at least one of the next-generation structures seems to be getting the green light.


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