The SEC has approved the application of Eaton Vance to launch a new type of non-transparent exchange-traded fund on the heels of denying applications from BlackRock and Precidian in recent weeks. While the Exchange Traded Managed Funds (ETMFs) would share many of the same features as ETFs, they would utilize NAV-based trading for market transactions. In other words, transactions effected on the exchange would occur at a premium/discount to NAV and not a specific price (e.g. NAV-$0.20/share, NAV+$0.10/share). The price for the transaction would then be set when the NAV was actually calculated.
In denying the active ETF applications from BlackRock and Precidian, the SEC raised concerns that the lack of portfolio transparency would remove the ability for useful arbitrage to maintain a relatively narrow spread between market prices and NAV, and would prevent market makers from being able to calculate the funds’ intraday NAV resulting in difficulty hedging positions and thus wider spreads to account for increased risk. In contrast, because trading in ETMFs would be based on a premium/discount from NAV, investors would be fully informed of the price difference from NAV, and market makers would not need to hedge positions because there would be no intraday market risk.
Like ETFs, transactions with an ETMF directly can only take place in creation units, primarily on an in-kind basis. To maintain a level of confidentiality, the basket “would normally not be a pro rata slice” of the ETMF’s portfolio. Where the ETMF was moving out of or into positions, those securities would be excluded from the basket until the move was complete. Also, the adviser would be able to exclude a security from the basket “when deemed . . . to be in the best interests of an ETMF and its shareholders.” Where the stated basket value deviated from the NAV, the difference would be made up with cash. This “balancing amount” would be published daily with the portfolio holdings.
On Friday, the SEC also approved a request by Nasdaq to list the ETMFs. According to the order, though retail investors should see a representation of price as the premium or discount from NAV, Nasdaq would use a “proxy price” to accept orders (e.g. for a proxy price of $100.00, NAV-$0.01 would show as $99.99). The application received six comment letters, including one from Precidian that opposed the request.