Eaton Vance moved one step closer to offering a non-transparent, actively managed municipal exchange-traded fund.
The asset managers filed an application with the Securities and Exchange Commission seeking exemptive order relief to create and offer exchange-traded managed funds to investors. These ETMFs would give investors the benefits of an ETF with the performance characteristics of an actively managed fund. And they would forego the responsibility to disclose holdings daily of the funds, thus keeping confidential information on current portfolio trading.
Eaton Vance filed its application with the SEC last week. Timing for the SEC's decision could not be estimated, according to Stephen Clarke, president of Navigate Fund Solutions, a subsidiary within Eaton Vance in its effort to offer and market ETMFs.
"We're encouraged, from conversations we've had with the SEC over time," he said. "It's up to the SEC for ultimate approval and timing from here."
If the application receives approval from the SEC, Eaton Vance plans to launch 15 to 20 ETMFs that mirror its existing mutual funds. Of those, "a few" could be muni bond-based, according to the firm. Eaton Vance and its affiliates have $29.5 billion in muni assets under management as of the end of January.
Eaton Vance also aims to license the underlying technology to other fund groups.
The ETF structure, as compared to that of mutual funds, has some efficiencies built into it. For one, ETFs generally create or redeem in kind. This means that the fund, when it's growing, receives securities that it wants to own in what's called the creation transaction, generally without cost.
By comparison, investors send cash to a mutual fund. Portfolio managers put the cash to work buying securities, thereby incurring costs from commissions, the bid-ask spread, and market impact.
ETMFs, like ETFs, would have lesser transfer agency costs. And the structure of the ETMF should generate around 50 basis points of performance improvement, as compared to the same investment strategy offered in a mutual fund, Clarke added.
"So, the audience of roughly $8 trillion invested in actively managed mutual funds in the U.S. should be very interested in a product structure that would offer the opportunity for improved performance," he said.
The ETMFs are expected to trade on an exchange at a market-set premium or discount to the fund's closing net-asset value. There are a couple of advantages to investors of not disclosing daily holdings.
For one, not disclosing holdings daily can prevent the front-running of portfolio trades, as market makers won't have intraday exposure to hedge. What's more, it would complicate any efforts by imitators to replicate a fund's portfolio positioning, according to Eaton Vance.