In a very interesting new development, Eaton Vance (NYSE:EV)– which is one of the largest money managers in the US managing assets in excess of $185 billion – has acquired a company called Managed ETFs LLC, as was reported by Bloomberg late in the day yesterday. Managed ETFs LLC is a company based out of Summit, NJ that was co-founded by Gary Gastineau and Todd Broms. Gastineau is also the principal of ETF Consultants and he has been behind the formulation of a new approach to operating actively-managed ETFs through something called “NAV-based trading” – a patented mechanism that he spoke to us about in a detailed interview in October. NAV-based trading is a mechanism through which actively-managed ETFs could supposedly be operated effectively without providing the full holdings transparency that is currently the bane of providers looking to enter the Active ETF space. Gastineau mentioned that he has been in talks with the SEC with regards to this proposition. Thomas Faust, CEO of Eaton Vance, told Bloomberg that, “We believe what they’re developing is a leading candidate for making non-transparent, actively-managed ETFs a reality”. In the firm’s press release, he added that, “Facilitating more robust ETF trading and expanding the scope of the ETF market to encompass non-transparent, active strategies is a vision we share with the principals of Managed ETFs”. Managed ETFs LLC has 3 patent filings going back to October 2008.
The SEC requires all actively-managed ETFs in the US to disclose their complete holdings before market open on the following day, with a 1-day lag. Many market participants and observers have indicated that this disclosure requirement is a major hurdle for active managers who prefer to hold their cards close to their chest and not broadcast their strategies to the world. Patrick Daugherty, a partner at Foley & Lardner who was involved with the launch of the first Active ETF in the US, spoke with us and said there’s little doubt that it discourages potential entrants and many have decided to stay out of the Active ETF arena for that reason.
Eaton Vance had first indicated its interest in the actively-managed ETF space in March 2010 when it filed with the SEC to launch 5 actively-managed bond ETFs. Each of the 5 Eaton Vance ETFs had names identical to existing and planned ETFs from PIMCO’s thereby trying to attack some of the success that PIMCO has had in the Active ETF space. Since then, Eaton Vance hasn’t seen any progress of their plans on that front. However, importantly, each of these 5 planned Active ETFs would have been fully-transparent just like all other Active ETFs on the market.
The acquisition of Managed ETFs LLC indicates a change in approach and an attempt from Eaton Vance to develop non-transparent actively-managed ETFs that wouldn’t have to fully disclose their holdings, and hence strategies, as perceived by many active managers. BlackRock iShares is the other firm that has previously attempted to get approval from the SEC for a non-transparent Active ETF. In June, Bloomberg reported that BlackRock iShares had filed with the SEC seeking approval for actively-managed ETFs “that would keep some of their assets undisclosed”. Till date, there hasn’t been any actively-managed ETF approved by the SEC that has not required full disclosure of holdings. Since then, iShares has filed for conventional active bond and active equity ETFs that will provide full disclosure. Whether Eaton Vance has any more success than iShares is what will be interesting to see. If Eaton Vance is able to successfully launch a non-transparent Active ETF, that would mark a major change in the industry, a change that will likely encourage many active managers who’ve previously had reservations to enter the space.
Disclosure: No positions in above-mentioned names.
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