Eaton Vance Wins Exemptive Relief

April 05, 2011

Eaton Vance wins exemptive relief, and remains focused on nontransparent active ETFs.


Eaton Vance, the Boston-based firm known for its extensive lineup of closed-end funds, won the right to market actively managed ETFs from the Securities and Exchange Commission, raising the question of what its next move might be, particularly as it relates to nontransparent ETFs.

Indeed, apart from seeking the so-called exemptive relief required to market ETFs, Eaton Vance also bought the assets of Managed ETFs, a company owned by Gary Gastineau, a longtime ETF industry consultant and a staunch advocate of nontransparent ETFs.

The issue of being able to offer nontransparent active ETFs is a central concern of some of the mutual fund firms that have begun the regulatory process to be able to offer ETFs. They appear to want to get into the growing ETF market while preserving one of the cornerstones of active management, namely not having to disclose portfolio holdings daily as ETFs are now required to do.

“The exemptive relief actually allows us to move forward in our efforts with Gary and Managed ETFs in the nontransparent active space,” Robyn Tice, a spokeswoman at Eaton Vance, said in a telephone interview. “That’s going to be our primary focus.”

“It’s going to help us to more fully think about what we plan to do and how we plan to do it, so it gives us the ability to have that flexibility now,” she added, referring to its exemptive relief status, which it earned on March 30. Tice declined to say whether Eaton Vance might first bring transparent ETFs to market before it solves the conundrum as to how to offer a nontransparent exchange-traded product.

A lot is at stake. Assets in U.S-listed ETFs are rapidly approaching $1.1 trillion, though well less than 1 percent is in actively managed strategies. Some think that could change if active ETFs are ever successfully introduced.

Many industry sources have told IndexUniverse that the possibility of a nontransparent ETF will only be real once the SEC specifically allows such funds to be marketed. And that day could be a long way off, particularly considering how busy the commission is with other concerns, including its ongoing derivatives review.

However, few seem to think actively managed ETFs of the future will operate like active mutual funds, and be required to disclose holdings quarterly with a 60-day lag. That could make for a regulatory row that’s a bit less difficult to hoe.



NAV-Based Trading

Indeed, people such as Gastineau are focused on alternative ways to achieve nontransparency.

“Active management is a very superior way to go,” Gastineau told IndexUniverse in an interview last year.

He stressed that the key to doing nontransparent ETFs is using so-called NAV-based trading. NAV-based trading allows managers of nontransparent funds to trade securities throughout the day at prices determined at or relative to net asset values calculated on that day.

“If market makers don’t have to make markets at intraday prices, they can plan their market making based on their inventory,” Gastineau said.

“They can create or redeem—you have to give them information on what the costs to create or redeem are—and that you can do. But you don’t have to give them any information on the composition of the portfolio other than what would be delivered today in a typical mutual fund,” he explained.

Fixed Income Comes First

In its initial exemptive relief filing in March 2010, Eaton Vance outlined plans for five actively managed ETFs focused on investment-grade U.S. debt. The funds are:

  • Eaton Vance Enhanced Short Maturity ETF
  • Eaton Vance Government Limited Maturity ETF
  • Eaton Vance Intermediate Municipal Bond ETF
  • Eaton Vance Prime Limited Maturity ETF
  • Eaton Vance Short Term Municipal Bond ETF


It’s fitting that Eaton Vance is looking to fixed income as the first frontier, because many ETF industry sources are all but convinced that that’s a pocket of the fund industry where index funds already actually look like they’re active.

That’s because most bond indexes are vast and full of illiquid securities, forcing fund managers to sample portions of the indexes in so-called optimized strategies. Those choices don’t seem so different than an active manager’s picking of securities—even when those “passive” filters are packaged as part of a rules-based indexing methodology.

In a related vein, the most successful active ETF—which isn’t nontransparent—is a fixed-income security, the Pimco Enhanced Short Maturity Strategy ETF (NYSEArca: MINT). MINT is a money market fund proxy that had gathered $1.2 billion as of April 4, according to data compiled by IndexUniverse.

Tice declined to be precise about Eaton Vance’s next moves.

“Our product plans are still in development, so I couldn’t tell you in any detail today about the strategies we plan to bring to the market or when they’ll be available.”


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