Eaton Vance Files to Start Active ETFs Using New Model

Eaton Vance Corp. asked U.S. regulators for permission to start a series of actively managed exchange-traded funds that wouldn’t disclose their holdings daily.

Eaton Vance filed with the U.S. Securities and Exchange Commission to open what it calls exchange-traded managed funds, or ETMFs, the Boston-based company said today in a statement. The funds would mirror existing Eaton Vance mutual funds and the firm seeks to license the model to other fund providers, according to the statement.

Active ETFs typically combine the security selection of a fund manager with the intra-day trading and cost-saving characteristics of ETFs. Companies interested in that hybrid have so far been largely discouraged from opening products, especially those focused on equities, by the SEC’s requirement for daily disclosure of ETFs holdings. Active ETFs in the U.S. hold $12.3 billion, less than 1 percent of assets in the $1.4 trillion ETF industry, according to data compiled by Bloomberg.

“By removing the requirement for daily portfolio transparency, ETMFs can enable investors to access a broad range of active strategies through a vehicle that provides the investor benefits of an exchange-traded fund,” Eaton Vance said in the statement.

Eaton Vance, the firm best known for selling products designed to minimize taxes, managed about $248 billion in assets as of Jan. 31.

Intraday Trading

If approved, the Eaton Vance products would lack an important characteristic of existing ETFs: the ability to trade in or out of the product at current prices. Buyers and sellers would submit bids and offers relative to the end-of-day net-asset value of the fund, meaning the final settlement price would depend on the fund’s value at 4 p.m.

“This is not a trading vehicle,” Stephen Clarke, head of the Eaton Vance unit that is developing the new products, said in an interview today. “For most investors, intraday price discovery is more a feature than a benefit.”

Clarke said he estimates the products would provide an annual return for buy-and-hold investors that’s about 0.5 percent higher compared with their mutual-fund counterparts because of cost savings made possible by the ETF structure. The savings would include trading expenses and administrative costs specific to mutual funds.

Daily Disclosure

Existing ETFs must disclose holdings to enable market makers to execute arbitrage trades that keep an ETF’s share price in line with the underlying value of its assets. Eaton Vance’s model would use so-called net-asset-value-based trading that would allow that process to take place without full disclosure of holdings.

BlackRock Inc., the world’s largest money manager, asked the SEC in September 2011 for permission to open active ETFs that wouldn’t reveal holdings daily. It hasn’t yet received approval.

Companies have said they fear the mandatory transparency of ETFs makes it too easy for opportunistic traders to jump in ahead of transactions made by an active manager, allowing those traders to benefit from resulting price changes, a tactic known as front-running. Most ETFs are passively managed, with their holdings mimicking indexes.

That concern isn’t as pronounced on the fixed-income side, where the opacity and negotiated nature of transactions in the over-the-counter bond market protect managers. Pacific Investment Management Co.’s Bill Gross has gathered $4.3 billion in 13 months into the ETF version of his Pimco Total Return Fund.

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