Lots of drama in the exchange-traded fund (ETF) industry recently as regulators finally gave their approval to a product that blurs the boundaries between mutual funds and ETFs. On Nov. 6, the U.S. Securities and Exchange Commission (SEC) approved Eaton Vance Corp.’s proposal for a new kind of ETF that won’t disclose its holdings daily. This happened after the industry was hit by this major setback when the SEC rejected BlackRock’s proposal to launch a non-transparent ETF.
That was a key blow to an industry that has been looking for ways to break down the stronghold of the mutual fund industry. Since ETFs are required to disclose their holdings throughout the day, it’s difficult for active managers to get ahead of the market in the same way mutual fund managers can. Non-transparent ETFs wouldn’t be required to disclose holdings daily—and that could lead to a lot more growth in the actively managed space.
The new product proposed by Eaton Vance is to be called an exchange-traded mutual fund (ETMF). It will be marketed under NextShares and is backed by Nasdaq. It won’t trade intraday, and, like a mutual fund, it will be priced once a day after the close. There is no information about the costs at this point.
Said Eaton Vance CEO Thomas Faust, the product has the potential for active investing what ETFs did for passive investing. Currently, actively managed ETFs account for less than 1% of U.S. ETF assets.
In a lot of ways, however, there are still some question marks around how the industry will respond to the structure of the product. It’s hard to underestimate the importance of ETF transparency, particularly to institutional investors, which have been encouraged to find a place for these products in their portfolios.
The role of ETFs in pension portfolios, for example, been growing exponentially over the past few years, as the Greenwich Survey shows time and time again.
Will ETMFs muddy those waters and create too much opacity? And does the merger between active and passive management in this way take ETFs beyond the comfort zone of some investors? We’ll need to learn more about the products’ cost and liquidity for starters, as well as how they will be constructed.
In the meantime, it looks as if we’re going to be hearing a lot more about ETMFs in the future.