Tag Archives: ETMFs

Eaton Vance ETMFs Get Boost By RIA Titan Envestnet

MarketsMuse blog update is courtesy of BrokerDealer.com and initial reporting by InvestmentNews.com and profiles the deal between RIA titan Envestnet and mutual fund king Eaton Vance, which is now approved to promote its novel, actively-managed ETF product “NextShares.” NextShares are exchange-traded funds that are both actively managed and unlike any other ETF product, does not disclose the underlying components of the respective ETFs. These products now go by the acronym “ETMFs.”

Since its approval, Eaton Vance has had to work hard to convince competitive money managers to license its patent and persuade broker-dealers that it is in their interest to make NextShares available to advisers even though the funds don’t offer the same underlying fees to encourage distributors. Eaton Vance’s NextShares-promoting subsidiary, Navigate Fund Solutions, has had to make that case before it even has a product on the market or a distribution partner.

BrokerDealer.com provides a global directory of regulated securities industry professionals operating in 30 major countries across the free world.

The deal is a big win for Eaton Vance, an actively managed mutual fund company that’s hoping to replace those products with a potentially more tax-efficient vehicle that could lower costs and improve performance for investors. Envestnet is a major gatekeeper in the fast-growing market of independent financial advisers, providing services for over $700 billion in client assets.

In a statement, an Envestnet executive, Jim Patrick, described NextShares as a “groundbreaking fund structure” and said the company sees offering the funds as part of its mission to help advisers deliver “wealth management services in the most cost- and tax-efficient way possible.”


NextShares was the first and remains the only structure approved by the Securities and Exchange Commission that allows an actively managed open-end fund to trade on exchanges without regularly disclosing its holdings. Portfolio managers resist showing the securities they buy and sell, in part to prevent being taken advantage of by competitors.

– See more at: BrokerDealer.com

Actively-Managed ETF Smackdown: Eaton Vance vs. Precidian

As reported previously by MarketsMuse, actively-managed ETFs, aka AMETFs (or as Eaton Vance has dubbed their product: “NextShares ETMFs”) are the next holy grail for Issuers of exchange-traded funds simply because these new-fangled products offer a refreshing new batch of flavors to a product category that has nearly 2000 issues whose structures are pretty much the same and all are intended to compete with traditional mutual funds. Eaton Vance is a pioneer in actively-managed exchange-traded funds, and Precidian Investments is biting on their heels so far with their proposal for “ActiveShares”. The difference between the ‘actively-managed’ types vs. the plain vanilla ETFs is total lack of transparency; investors in actively-managed ETFs do not know what the underlying components are, so the value proposition is presumably based on the ETF managers’ capabilities.

For some, actively-managed ETFs are the perfect product for hedge fund operators to promote, given that hedge fund investor appeal for investing in hedge funds is the secret sauce each of them purportedly uses to make profits for investors, or per industry jargon, “capture Alpha.”

For ETF market-maker veterans, the notion of not knowing what the underlying components are is counter-intuitive. Unlike a traditional, single stock specialist who makes a two-sided market in IBM, and is willing to either buy or sell based on their ability to gauge which direction the stock is headed next, ETF market-makers don’t take that kind of risk, they make money by providing a two-sided aka bid-offer market in any particular ETF  based solely on their ability to arbitrage the underlying components vs. the cash price of the ETF. In simple speak, an ETF market-maker is only interested in offering 50,000 or more shares of the ETF if they can simultaneously purchase the underlying constituents of that ETF at an aggregated price that is less than the current offering price of the ‘parent’ ETF.  They will only make a bid for a block size trade if they think they can simultaneously sell-short the underlying constituents such that the aggregate ‘sale price’ is greater than the price they pay for the cash ETF product.

Irrespective of whether actively-managed ETFs can prove to be liquid trading vehicles, which is arguably a criteria for most investors, NextShares non-transparent product has been approved by the SEC, while its competitor, Precidian Investments continues to face hurdles with the regulators. Perhaps this is a who-you-know issue. As noted by WSJ’s coverage by Daisy Maxey:

Regulators denied a second request from Precidian Investments for approval to launch actively managed exchange-traded funds that wouldn’t have to disclose their holdings daily, as ETFs now do. The latest SEC denial of Precidian’s ETF plan “ActiveShares”became public Monday when competitor Eaton Vance posted it on its website. In October, the SEC denied Precidian’s filing for a nontransparent active ETF that would trade on an exchange. Precidian refiled with the regulator in December after making changes, seeking exemptive relief to launch its funds, which it called ActiveShares.

But in a denial letter dated April 17 that just become widely available, the SEC notes that it had previously denied a “substantially similar” proposal from Precidian.

Daniel McCabe, chief executive at Precidian, said the company is in a “fruitful” and ongoing dialogue with regulators, and plans to refile to launch the funds.

The latest SEC denial of Precidian’s ETF plan became public Monday when competitor Eaton Vance Corp. posted it on its website. Eaton Vance, which has received SEC approval to launch a related product called exchange-traded managed funds, said it obtained the SEC communication to Precidian through a Freedom of Information Act request. Precidian’s product would have been a competitor to the ETMFs planned by Eaton Vance.




What’s Next: ETFs For Crowdfunding Industry?

This post was written by Pete Hoegler, Washington DC-based Social Media Savant for The JLC Group. 

Three years after the JOBS Act was passed, it seems that Washington is back for more–a curtain call if you will–making it easier for small ventures to raise capital.

The House Financial Services Committee in early June floated a draft bill that would allow the creation of “venture exchanges” tailored to the needs of small companies looking to raise money. In many ways, the success of the JOBS Act hinges upon the creation of such markets. A healthy secondary market created liquidity that is critical to building investor confidence and creating a robust alternative to the global markets that today are dominated by enormous corporations.

The new proposed “venture exchange” laws are aimed at increasing access to early stage investors in private startups and small businesses (some of which could be JOBS Act enabled investors), as a lack of liquidity was a concern voiced by some surrounding the new laws for equity crowdfunding with non-accredited investors.

Investors in technology startups, for example, are likely to have to hold their position in any one investment for an average of 7 years. Creating opportunities for selling private stock in a start-up investment sooner through venture exchanges has the potential to reduce some of the early stage investment risks.

Where or How is there a link between Crowdfunding and Exchange-Traded Funds? Well, those following the creative finance wizards from the world of exchange-traded products can speculate the next  innovation will be ETFs comprised of non-public companies that were funded via crowdfunding platforms..and those companies will be labeled “pre-emerging start-ups” and there will be ETFs for each category of ‘project.’

While the underlying components might not necessarily be easily-traded by the universe of market-makers who profit by arbitraging the cash index vs. the underlying constituents, the advent of ETMFs, a structure that Eaton Vance hopes to bring to market and is based on a “non-transparent” construct (meaning the investor has no idea what the underlying constituents are), Crowdfunding ETFs could create markets that allow early investors who invested via equity crowdfunding to hedge their bets far before any kind of liquidity event like a public offering (IPO) might take place, spelling an opportunity for liquidity for those early investors.  Just like the current ETF landscape, these crowd-funding indexes would be themed according to industry sector and/or product categories.

OK, some of the wonks who are reading that last tongue-in-cheek idea might be rolling their eyes. That said, given the creative juices that flow from the capital markets, we’re willing to bet that at least one of the current innovators in the ETF world grabs on to this idea and such products will be introduced within the next 18-24 months. Oh, it was our idea…

The number of IPOs has gone from an average of 311 from 1980-2000 down to an average of 99 IPOs each year from 2001-2011 so opening up other alternatives for liquidity will de-risk the growing number of startup investments happening online.

This is yet another step towards reforming our capital markets. The first step was to enable access, and was addressed by Titles II, III & IV of the JOBS Act. So regardless of your opinion on this matter, the summer is shaping up to be an interesting time for equity crowdfunding investors, accredited and non-accredited alike.

Eaton Vance Ups ETMF Ante; Payment For Order Flow: Bounties For BrokerDealers

MarketsMuse ETF update profiles a novel “payment-for-order-flow” approach on the part of ETF issuers who vie to whoo broker-dealers to promote their products to investors. Eaton Vance Corp. said Thursday it may help brokerages foot the bill to make its new type of actively managed exchange-traded products, called NextShares, available to their clients. Below extract is courtesy of Reuters’ Jessica Toonkel reporting

In an unprecedented move, Eaton Vance Corp will offer to help some brokerages pay their technology costs to make the fund company’s new breed of exchange-traded managed funds (ETMFs) available to investors, Tom Faust, Eaton’s chief executive officer, told Reuters this week. ETMFs are a hybrid between actively managed mutual funds and exchange-traded funds.

The Boston-based company also plans to pay brokerage firms a share of the revenues from the sale of the funds, which Faust hopes will be available by year-end.

BrokerDealer.com maintains the world’s largest database of broker-dealers and encompasses brokerdealer firms based in nearly 3 dozen countries

Tom Faust, Eaton Vance
Tom Faust, Eaton Vance

Big-name firms like Fidelity Investments and TD Ameritrade told Reuters they will not sell the funds until they see demand.

Helping to cover technology costs of distributors is new, but so are the Eaton Vance products, which require brokerages to take a new kind of order from investors, experts said.

“This is the first time I have ever heard of a firm offering to pay some brokerage costs for a new product,” said Ben Johnson, an ETF analyst at Morningstar.

He said the cost of gearing up to sell the product has been a sticking point for brokers. However, a number of executives at brokerage firms and industry consultants told Reuters that questions about whether there will be investor demand, and how they will get compensated to sell the new products, are even bigger issues that could keep them from selling the funds even with the Eaton Vance offer on the table.

Faust said figuring out the economic incentives and getting the systems up and running is top of mind for Eaton Vance.

“The biggest challenge we see at this stage of the game is getting broker dealers,” Faust said. “If we are looking to launch before the end of the year, we need the broker dealers to start making systems changes and otherwise preparing themselves to offer this to clients.”

Eight outside fund managers, including Mario J. Gabelli’s GAMCO Investors Inc., have licensed the right to sell NextShares. But large broker-dealers have not yet indicated that they’re taking the steps to offer them to financial advisers.

Investors will need to be informed by broker-dealers of the unique qualities of the funds when they trade, and they will place exchange orders in a way that differs from stocks or ETFs.

For the full article from Reuters, please click here


As the exchange-traded fund marketplace continues to evolve, the recent introduction of “exchange-traded managed funds”, aka ETMFs, has opened Pandora’s Box for those who have embraced “traditional” ETFs because of their transparency, real-time pricing (vs “end of day price setting”) and the relative ease of diagnosing liquidity by interrogating bid-offer markets in the respective underlying components.  The ETMF construct is intentionally-designed to mask the underlying components because (i) the underlyings are subject to change subject to the active manager’s strategy and (ii) mitigate the risk of market participants ‘gaming’ the cash ETMF via arbitraging the underlying components.

The excerpt below is courtesy of the 2nd of a series of interviews conducted by PA-based ValueShares and insight provided by Mike Castino, Senior Vice President.


Mike Castino, Senior Vice President

Mike Castino serves as business development officer for the Exchange Traded Funds division. Mr. Castino joined U.S. Bancorp Fund Services in 2013 with more than 20 years of business development, relationship management, marketing, managerial experience, and futures/equity trading experience. Prior to joining U.S. Bancorp Fund Services, Mr. Castino worked for Zacks Investment Management as managing director of the Index Services Division. He also held the position of vice president of Institutional Sales for Claymore ETFs (now Guggenheim Funds) and was senior floor trader at the Chicago Mercantile Exchange for a major Wall Street trading firm. He is also serves as chairman and trustee of ETF Series Solutions, our ETF trust. Mr. Castino received his Bachelor of Arts degree in business management from Illinois State University and is Series 7 and 66 licensed.


The SEC recently approved Eaton Vance’s application to create exchange traded managed funds, or ETMFs. What is your opinion of ETMFs? Will the mutual fund companies now rush to launch ETMFs, and pay licensing fees to Eaton Vance, or will we see mostly just Eaton Vance products?

Mike: ETMFs are a welcome step forward in the in the evolution of non-transparent ETFs. Mutual fund families concerned about the non-daily disclosure of portfolio holdings can benefit from this structure as well as the added ability to mitigate capital gains. Given these benefits, Eaton Vance believes their clients may benefit from this structure, and mutual fund families sharing this sentiment may also be candidates for licensing this intellectual property.

While widely viewed by the larger investment community as a hybrid of existing structures, a mutual fund and an ETF, the SEC defines ETMFs as a separate and new structure. This becomes critical to definitively understanding which regulatory agencies or SROs, such as FINRA, may be establishing guidelines for this new structure, and what these guidelines may entail. At this time it is unknown whether it will it be similar to existing policies and procedures, or if regulatory changes will be occurring in the future.

Are ETMFs good for the investor? Specifically, can you help us understand ETMF liquidity? ETMFs will be “non-transparent” in the sense that they will only disclose their holdings monthly, or quarterly with a lag, as with mutual funds. Yet, if Authorized Participants (market makers) don’t know what an underlying ETMF basket looks like, how will they be able to maintain tight NAV spreads via the arbitrage process, as they do today with traditional ETFs? Any insights?

Mike: The ability to buy/sell shares of the ETF during the day at traditional bid/ask pricing does not exist in in the ETMF structure. ETMFs will be priced at the ETMF end of day NAV, plus or minus a determined spread.

To illustrate, let’s assume you purchased an ETF and an ETMF with the same underlying portfolio holdings at 10 a.m. on the same day. At the time of the purchase, the ETF was bought for $25 and the ETMF was bought for the NAV of $25 plus $.01. After the purchase, the market rallies before the end of the day. You paid $25 for the ETF which settles later that day at $25.50. The ETMF NAV will also have gained that day, but since your ETMF purchase price is based on end-of-day NAV, your actual purchase price is $25.51 ($25 starting NAV plus $.50 gained in the rally plus $.01). Effectively, you did not participate in the rally even if you purchased the ETMF at the same time as the ETF. Likewise, if you sell out an ETMF in the morning in anticipation of a sell off, you still get the end-of-day NAV plus or minus pricing.

This in no way indicates a flaw in the ETMF structure or that they are bad for investors. Many buy and hold investors will like the fact that they get end of day pricing and may not be subject to an intraday premium or discount relative to the current NAV. This holds true for many long-term mutual fund investors who will now potentially benefit from the tax mitigation features of ETMFs. It may be only tactical investors who are looking to buy at the start of the rally and capture that price movement, who would not find it beneficial to purchase an ETMF.

Liquidity and effectively pricing the shares may be a concern for some market makers. The specifics of what will be known about the portfolio when disclosed in the create/redeem process and what may have to be “reverse engineered” during the trading day if the ETMF is making changes to its portfolio during the trading day may widen spreads and affect the depth of book. Regardless, a portfolio of highly correlated, liquid securities may help market makers more confidently price the fund. While this is my opinion, investors should consult a market maker for their professional opinion.

What do you think are the most important considerations in selecting key service providers (e.g., custody, fund administration, fund accounting, statutory distribution) for an ETF?

Mike: Selection of an experienced service provider is an operational necessity. The greatest operational and cost efficiencies can often be achieved by using a service provider who offers full service options inclusive of administration, accounting, custody, index receipt agent and distributor services. This service offering should be built on state-of-the-art technology for create/redeem order entry among the seamlessly integrated internal systems that provide necessary access and reporting capabilities for the client and capital markets participants.

Beyond these services, the ability to provide an existing multiple series trust in which you can launch your ETF(s) using your own relief or “rented” relief is very helpful to new clients.

Many ETF providers have struggled with the question of distribution. It can be hard to identify who is buying ETFs on the secondary market, and this creates challenges for salesmen, who can’t attribute a secondary market trade to specific actions they took to make a sale. How do you think the industry will ultimately solve this problem?

Mike: Many wirehouses may be able to provide this information to you for a fee. There are data vendors out there who offer limited, but useful, data in this area of ETF ownership information as well.

Many ETF sponsors pay their ETF wholesale teams based first on a share of “pooled commissions” from AUM gathering. Additional incentives/commissions may be paid based on success stories wholesalers can provide their managers. For example, if they have a particular wirehouse advisor or RIA team that invests heavily in an ETF or ETFs, they may be inclined to contact the manager regarding that wholesaler and the valuable assistance they provide.

Due to the exchange listed nature of ETF shares, and the fact that they are not “transactional” like a mutual fund or unit investment trust, there may never be a final solution. But the current system of sharing a portion and building a case for additional incentives based on hard work should never go out of style. ETFs require servicing after the sale and the best wholesalers are product experts who can answer questions about the ETF methodology and other vital ETF subjects such as creation/redemption, liquidity, and best execution.

ETFs Getting Blurry: New “ETMFs” Hard to See Through; Harder to Hedge

marketsmedia logo  Excerpts Courtesy of MarketsMedia

The lines of demarcation between actively-managed investment vehicles are getting fuzzier with the advent of non-transparent, actively-managed ETFs.

Black Rock, State Street, Eaton Vance and T. Rowe Price, among others, have filed applications with the Securities and Exchange Commission (SEC) to develop actively managed non-transparent ETFs that will disclose individual holdings every three months, just like mutual funds. These hybrid ETFs are also known as exchange-traded managed funds (ETMFs).

“What everybody is talking about today is non-transparent active ETFs, where a fund can change their basket all the time, and market makers don’t what their actual underlying stocks are,” said Phil Mackintosh, global head of trading strategy at Credit Suisse. “These active ETFs would look more like actively managed mutual funds.”

Mackintosh noted that these are different from transparent actively-managed ETFS. “There have been ETFs that pick stocks, which I would consider actively managed ETFs, for years. But these are transparent actively-managed ETFs, where the target portfolio is published daily and can be accurately hedged by market makers. Fund houses like PowerShares, WisdomTree as well as yield and volatility weighted ETFs offered by other providers are selecting stocks and stock weights based on specific factors that result in non-index weight portfolios.”

Mohit "Mo" Bajaj, WallachBeth Capital
Mohit “Mo” Bajaj, WallachBeth Capital

Since ETFs track an underlying index, the ETF may trade at a premium or discount to what it’s really worth. Reasons for premiums or discounts include liquidity of the underlying securities, liquidity of the ETF itself, costs associated with executing the underlying names, etc.

“We try to give our customers a menu of options for obtaining best execution, not only by finding the best price in the secondary market, but we also observe how the underlying names trade in the primary. In addition ETFs trade differently depending on the time of day, so we try our best to educate our customers on ways they can receive the best execution possible depending on what name they are looking to enter/exit,” said Mo Bajaj, director of ETF and portfolio trading services at ETF execution specialist WallachBeth. “Timing is an important aspect when trading any product. Certain names trade better earlier in the day and as the day progresses, spreads can widen.”

WallachBeth has been active in helping to execute both liquid and illiquid ETFs, such as emerging market and fixed income names, “which we have been able to provide our customers with very competitive pricing for,” said Bajaj. FOR THE FULL STORY FROM MARKETSMEDIA, PLEASE CLICK HERE.