In Search Of An Active ETF Model

January 16, 2014

NYSE Euronext, for example, operates a net asset value (NAV) trading facility for around 230 non-ETF active funds on its Dutch stock exchange, using the standard mutual fund forward pricing model.

On other European exchanges, fund trading resembles the ETF model of continuous intraday pricing. ESMA, in its 2012 guidelines, specified that all EU-based ETFs, including active ones, must have at least one market maker to ensure that a fund’s secondary market price does not vary significantly from its fair value.

Germany’s stock exchange, together with Switzerland’s SIX exchange and Denmark’s Nasdaq OMX exchange all operate versions of this trading model, with market makers offering to buy and sell fund units on the basis of a fund’s real-time value.

These differences in market practice, both within Europe and globally, could lead to confusion, admits Deborah Fuhr, partner at consultancy ETFGI.

“Many of Europe’s exchanges are creating mechanisms for the listing and trading of open-ended mutual funds, but usually these aren’t called ETFs,” said Fuhr.

“There’s potential for confusion: we could have a fund listed in the US and called an active ETF, while in Europe something very similar is not,” she said.

For those considering an active ETF launch, meeting the minimum regulatory requirements for tradeability does not ensure a fund’s success, says Europe’s leading issuer of this type of structure.

Over half the inflows into the funds of London-based ETF issuer Source during the last two years have been into what the firm calls value-added strategies.

“The word ‘ETF’ is just a wrapper,” M.J. Lytle, Source’s chief development officer, told

“There are two things to ask if you’re considering converting an active fund into an ETF: can you trade it, and can you trade it well? To trade it, you need a single market maker and to disclose a certain amount of information on a daily basis. To trade it well, you need to get the whole market involved, with multiple market makers and a real depth of liquidity. Even amongst index-tracking ETFs, only a few have those characteristics,” said Lytle.

Many of the active managers who approach Source with a view to creating ETF versions of their fund strategies end up deciding they are not comfortable with meeting the levels of disclosure that ETFs typically provide as a matter of course, said Lytle.

Some managers emphasise the potential cost savings that active ETFs can offer over traditional fund structures.

When making its recent application for a non-transparent active ETF in the US, fund manager Eaton Vance claimed its approach could improve returns by 50 basis points a year over those of a traditional mutual fund by economising on operating expenses and trading costs.



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