Last month, the SEC correctly shot down the nontransparent ETF application from BlackRock (NYSE:BLK) and Precidian as not being in the interest of the public. This week, many ETF pundits are trumpeting the SEC’s recent approval of Eaton Vance’s new ETMF (Exchange Traded Managed Fund) structure. However, for retail investors, ETMFs have little to nothing in common with “real” ETFs, and one has to look hard to identify even possible improvements to traditional mutual funds.
In a summary of the SEC’s action prepared by Ropes & Gray LLP, the SEC’s exemptive relief will “permit the operation of a new type of exchange-traded fund, called an exchange-traded managed fund (“ETMF”), the shares of which would trade on an exchange at prices that are based on the net asset value (“NAV”) next determined at the end of each day.”
If you believe that sounds more like the description of a mutual fund than an ETF, you are correct. ETFs have many features that differentiate them from traditional mutual funds, and most (if not all) of these differences are perceived as advantages. By removing nearly all of these differences, the new ETMF structure places it squarely in the mutual fund camp. Additionally, it even removes one of the best features of mutual funds, namely that all buyers and sellers receive the identical NAV-based price on any given day.
The new ETMFs and traditional mutual funds both:
1) trade at the end of the day (whereas ETFs trade throughout the day)
2) must be bought or sold prior to knowing what the price is (whereas ETFs maintain bid/ask quotes throughout the day and can use limit orders)
3) can be bought and sold through a brokerage account (one feature making them similar to ETFs)
4) are non-transparent in their holdings (whereas ETFs typically update holdings daily)
Shares of ETMFs will trade with new types of orders, NAV plus premium for buys and NAV minus fee for sales. Intraday values will be published every 15 minutes, instead of every 15 seconds for ETFs. However, these intraday values have no bearing on the price you pay. You could place an order for an ETMF at NAV plus $0.05 at noon, when the intraday value is $45.00. If the end-of-day NAV is 45.90, then your order will be filled at $45.95 (plus any brokerage commission). When buying or selling traditional mutual funds, shares are traded at NAV without any premiums or discounts.
The SEC also placed some restrictions on ETMFs. ETMF advertising:
1) cannot call them an open-end investment company
2) cannot call them a mutual fund
3) cannot call them ETFs
4) must include a statement to the effect that shares are not individually redeemable (when talking about creation/redemption of shares)
It is clear that ETMFs have no direct advantages over ETFs for investors. For fund managers, the advantage is keeping their trading activity and holdings secret. ETMFs do offer some advantages over traditional mutual funds for retail investors. Potentially lower expense ratios, potential tax-efficiency, and the publication of intraday values are a few that come to mind.
Bottom line: ETMFs are not ETFs (part of the SEC ruling). ETMFs are a giant step backward compared to ETFs, although they are potentially an incremental improvement to traditional mutual funds.
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