Mutual Funds Take New Routes To ETFs

January 24, 2014

Plans And More Plans

The cautious, one-step-at-a-time way that both MFS and TCW are proceeding is emblematic of the overall cautiousness exhibited by many firms signaling they want to enter the world of ETF sponsors. As noted, it seems many petitions to gain permission to offer ETFs might be gathering dust for now.

Like Prudential—which revealed in regulatory paperwork that it wants to bring to market an actively managed fund called the Prudential Core Bond ETF—most companies contemplating an entry into ETFs are more focused on bringing active strategies to market than passive ones.

Among the more interesting ideas in the realm of nontransparent active ETFs aimed at protecting a manager’s investment ideas, is one from Eaton Vance.

The Boston-based firm is looking to offer what it calls exchange-traded managed funds, or ETMFs, which are in some ways like open-end mutual funds. Like an ETF, and ETMF could trade all day; but like a mutual fund, it would only price once a day, using what the company calls NAV-based trade.

In NAV-based trading, prices would vary from NAV by a market-determined premium or discount, which could at times be zero, according to Stephen Clarke, president of Navigate Fund Solutions, an Eaton Vance subsidiary that will license the ETMF patent to other mutual funds once the exemptive relief is approved by regulators.

“We’ve been asked by regulators to be clear that an ETMF is not an ETF,” said Clarke, in a recent call with IndexUniverse analysts and reporters. “There are a few other companies that have filed for active, less-than-transparent ETFs, but we’re the only company that has filed for ETMFs.”

Regulators haven’t yet signed off on the company’s latest plan, but rumors are swirling that approval might be imminent. The company is rumored to have plans to replicate all of its existing mutual funds in an ETMF wrapper, which will have tax efficiency similar to an ETF.

Faith In A Blind Trust


Another idea that’s been floating out in regulatory purgatory for more than two years is based on a patent owned by New Jersey-based Precidian Investments.

Precidian, which has licensed the idea to both BlackRock and State Street Global Advisors, is proposing a nontransparent active ETF that would make use of a blind trust in the creation/redemption mechanism that is at the center of every ETF.

The blind trust would work on behalf of the authorized participant that would keep disclosure of portfolio holdings under wraps until regulators require it. To put that in context, existing mutual funds must disclose holdings every three months, with a lag, and it appears Precidian’s plan would include disclosure requirements similar to those in place for mutual funds.

Precidian this week filed in a prospectus detailing the first three nontransparent ETFs that could go long or short that it hopes to bring to market. They include:

  • ActiveShares Large-Cap Fund, which will invest in stocks included in the Russell 1000 Index;
  • ActiveShares Mid-Cap Fund, which will invest in stocks that are included in the Russell 2000;
  • ActiveShares Multi-Cap Fund, which will invest primarily in securities included in the Russell 3000 Index and ETFs

Under normal market conditions, its net long equity market exposure will not exceed 100 percent, and its net short equity market exposure will not exceed 30 percent. However, the portfolio managers may at times exceed these percentages, according to the filing.

Crucially, the plan doesn’t yet have the benediction of the Securities and Exchange Commission, but industry sources reckon Precidian must be making headway at the SEC, or it wouldn’t have filed the fund prospectuses.

The New York Stock Exchange has filed a request with the SEC to adopt a new rule that would permit “nontransparent” ETFs to list and trade on its platform. Specifically, the NYSE’s filing requested permission to list and trade Precidian’s three new funds.


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