Regulator approval of Eaton Vance's non-transparent ETF has its industry competitors closely studying its offering to determine how its proposal succeeded where others failed, and whether they need to develop and offer their own version.

Exchange-traded managed funds, or ETMFs, which are being branded by Eaton Vance as NextShares, have characteristics of both traditional mutual funds and ETFs. The SEC's ruling could open doors for more than a dozen of these funds as soon as next year, according to Todd Rosenbluth, S&P Capital IQ's director of mutual fund and ETF research.

Many fund providers were surprised when Eaton Vance received approval in early November for its non-transparent ETFs, which do not have to disclose underlying holdings daily. Later that month, BlackRock and Precidian Investments withdrew applications for their version of an actively managed, non-transparent ETF.

Amid regulatory setbacks for those firms seeking to cloak portfolio holdings, the transparent actively managed ETF space continues to grow. A question that dogs industry observers is how will the SEC's past and future decisions -- especially in light of Eaton Vance's new ETMF structure -- impact how fund providers will market and operate.


When it comes to how the SEC has responded to Eaton Vance's new ETMF structure, Rosenbluth says one of the things he noted was the SEC approved their version and not others.

It's clearly a big success for Eaton Vance's business, he says, since the firm has been consistently losing assets to ETFs. "Now they have ETMFs that could appeal to wider audience."

Eaton Vance's new ETMF structure will likely not impact all ETF providers, researchers and analysts say, since the structure is an entirely new product. "We think iShares, Vanguard and State Street will lose very little business as a result of this. The challenge is for other providers that have active mutual funds," Rosenbluth says.

To compete, active mutual fund providers will have to make some strategic choices, he adds.

One option would be to license Easton Vance's ETMF structure. A provider could also engineer their own solution that could mirror Precidian Investment's proposal that BlackRock partnered with to seek SEC approval. Another option would be to launch transparent ETFs along the line of offerings from Calamos, or a fixed-income solution akin to offerings from Pimco and Fidelity.

Rosenbluth adds active fund providers could also choose not to offer ETFs and stick with traditional mutual funds, but risk losing market share.


Sources note that Eaton Vance is likely to launch its ETMF products in the middle of 2015 and plans to license out the structure that's been approved to other providers and managers.

The firm will serve as a case study to other providers, eager to see if Eaton Vance succeeds or fails in launching, marketing and distributing their new product. If they succeed, other providers will mirror their approach and eventually also seek SEC approval. If they fail, other providers will stay clear, says Rosenbluth.

In the short-term, Eaton Vance will have to change their marketing approach.

"How will they present this choice to shareholders? They have traditional mutual funds and this new product that will be more tax efficient and have the ability to be fully invested," says Noah Hamman, CEO at AdvisorShares. The ETMF may be an easier story to tell for advisors because of its ability to be more tax efficient and fully invested, he adds.

Eaton Vance is marketing the ETMF as a lower cost version of investment strategies currently only available in mutual funds. For ETMF's to gain advisor adoption, there is no question the expense ratio needs to be lower than the mutual fund equivalent in order to gain any attention from advisors, says Matthew Fronczke, a director at research firm kasina.


Operationally, providers and researchers note that Eaton Vance has done most of the work needed to administer the product.

"The more important operational question is how the product will be traded," says Fronczke, adding that the intermediary trading platforms will need enhancements to work with the new investment vehicle. Technology enhancements will be related to how intraday pricing is published and how orders are entered and executed.

Furthermore, for Eaton Vance's ETMF structure to succeed it will need support from other asset managers to license to them. Currently they don't have any other asset manager that has signed on to new license agreement, which differs from the Precidian/BlackRock model that had backers.

"With support of other large brand name fund managers, advisors will have more confidence in the product as backing from a large brand will provide more credibility to the product," Fronczke says.

Researchers, analysts and providers note that the essential question fund companies will need to answer is whether they want to license Eaton Vance's structure or work with the SEC to develop their own offering.

Given the unproven nature of the products, Rosenbluth doesn't expect to see any new ETMF products hitting the markets in 2015.

"The asset management industry will not move too quickly and providers will wait and watch this to see if Eaton Vance can gather assets with this."

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