The Securities and Exchange Commission plans to approve the trading of a new type of exchange-traded investment, the regulator said late Thursday, delivering a long-awaited verdict to active managers looking to better compete with index-tracking products.
The regulator said it
intends to grant a proposal by the Eaton Vance Corp. to offer products called exchange-traded managed funds, which the firm says offer a lower-cost approach to investing in active management than offered by mutual funds and other products.
The proposal – about a decade in the making – is for a product that's a twist on mutual funds and exchange-traded funds.
In a statement, Eaton Vance said it planned to seek SEC approval for listing and trading on a national securities exchange of its exchange-traded managed fund, which it dubbed NextShares.
Late Friday, the SEC also approved a rule change at the Nasdaq Stock Market that would allow the listing and trading of NextShares.
In an interview, Thomas E. Faust Jr., chairman and CEO of Eaton Vance, said the firm hopes to move retail investors from mutual funds to a more cost effective investing structure. He said ETFs did the same for index investing.
“We see the same potential for NextShares to evolve actively managed investing from mutual funds to a more efficient, higher performing structure that captures the benefits of an exchange-trade fund but does it in a way that protects confidential trading information,” said Mr. Faust.
According to the commission's filing, “interested persons” can request a hearing until Dec. 1. The commission granting such a hearing and overturning a staff recommendation is uncommon, according to securities lawyers with knowledge of the process.
Currently, Eaton Vance plans to launch products by the second quarter of 2015, according to Mr. Faust. But that depends on further action by the SEC, including individual approvals for each ETMF product.
Last month, the commission
turned down a different proposal for nontransparent ETFs that it said were not in the public interest.
Active fund managers have been looking for new ways to emulate the success of ETFs, which grew to nearly $1.7 trillion in U.S. ETFs at the end of 2013, up more than 1,000% from $151 billion in 2003, according to the Investment Company Institute, an industry trade group. Just a fraction of that money is in actively managed products; most investors in ETFs are looking to track the performance of a market benchmark.
ETMFs are different from other investment products.
Like ETFs, ETMFs will trade on exchanges during the day. But like mutual funds, they can delay disclosure of their underlying holdings for several weeks, an approach that advocates say will allow managers to keep their strategies safe from competitive traders.
When an investor buys an ETMF, they commit to a transaction price equal to the net asset value of the product when the market closes, plus or minus a market premium or discount. They can estimate the transaction price based on fair-value estimates of the fund calculated throughout the trading day.
Backers of the product — which Eaton Vance plans to license to other fund companies — say it's cheaper for investors because it eliminates operational and tax inefficiencies associated with those products.
But the products will have naysayers.
Dave Nadig, chief investment officer at ETF.com and a proponent of index investing, said the way the funds trade could be difficult to understand for some investors.
“That's a big ask for most investors to have them understand how to place those kinds of trades,” Mr. Nadig said. “It's a big ask of the trading community.”
