Twenty-one years after the first exchange-traded fund
arrived as an alternative to the traditional mutual fund, a new regulatory
ruling could spur a rush into the ETF vehicle by traditional stock-picking
asset managers. The Securities and Exchange Commission late Thursday cleared
Boston-based Eaton Vance to launch a so-called nontransparent ETF that
will trade on an exchange but that doesn’t have to disclose its holdings and
doesn’t follow an index. Eaton Vance has plans to launch 18 such funds
over the coming months, the first fund company to do so.
Last month the SEC rejected a proposal for a competing
nontransparent-ETF design from BlackRock and Precidian Investments. The SEC
ruling may initially be more exciting for asset-management companies than for
individual investors.
In recent years, many investors have shifted dollars
from actively managed stock funds to index mutual funds and ETFs, most of which
follow an index. Few established fund companies have been willing to offer
actively managed stock ETFs, mostly out of concern that the required daily
disclosure of their holdings would allow other market participants to front-run
their buying and selling. Managers have generally been less concerned about
front-running with bond portfolios; some large companies, including Pacific
Investment Management Co., offer transparent active bond ETFs.
The new nontransparent design—which Eaton Vance said it
would offer to license to other companies—could make more fund companies
comfortable with offering active stock ETFs. That could potentially include ETF
versions of big, well-known stock mutual funds.
For investors, however, active stock ETFs raise many of the
same issues as active stock mutual funds, as my colleague Ari Weinberg wrote in
an article on active stock ETFs in March:
The fundamental challenge facing actively managed equity
ETFs is the same one facing conventional stock mutual funds: The odds are
stacked against active management.
While some active managers invariably will beat their
benchmarks, others will trail theirs. On average, fund investors can expect to
get market returns, reduced by the funds’ expenses, which generally are higher
for active managers than for index funds because investors are paying for a
stock picker’s expertise.
Active stock ETFs could potentially be less costly for
investors than active stock mutual funds, as there are typically fewer
administrative and distribution-related costs baked into ETF expense ratios.
ETFs also don’t have sales commissions, as some mutual funds do. But if
offering an active stock ETF required paying a licensing fee for the
nontransparent product design, that would be an added expense compared with an
index ETF.
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