Eaton Vance's Thomas Faust: Non-Transparent Active ETFs Not Likely a 2011 Event

by: Shishir Nigam

In an interesting interview, InvestmentNews’ Jessica Toonkel, spoke with the CEO of Eaton Vance – Thomas Faust. Eaton Vance (NYSE:EV) made a big move in Nov 2010 when it acquired Managed ETFs LLC, a firm run by Gary Gastineau. Gastineau is well-known for his expertise in the ETF industry and more recently for his work on making non-transparent actively-managed ETFs a reality. In March 2010, Eaton Vance had first indicated its interest in the Active ETF market by filing an exemptive relief application with the SEC to launch five active bond ETFs.

Gary Gastineau has written about the use of “NAV-based trading” as a key component in bringing non-transparent Active ETFs to market. When we spoke to him at length in an interview last year, Gastineau provided a detailed explanation of how NAV-based trading would work and how it would enable actively-managed ETFs to still operate effectively without full transparency of their holdings. Eaton Vance’s acquisition of the patents owned by Managed ETFs LLC, Gary Gastineau’s firm, showed a clear belief in importance of the transparency issue. Speaking to InvestmentNews, Thomas Faust confirmed this, saying that “We recognize that the transparency is a huge issue. It is certainly our view that for a large percentage of active strategies, it doesn’t make sense to communicate to the world effectively in real time what you own and your trading activity.”

Asked about how and when these non-transparent Active ETFs could become a reality, Faust said that they would first need to get this kind of trading approved by the SEC, after which they would need exemptive relief to launch Active ETFs that utilize that trading mechanism. In our interview with Gary Gastineau, he had said likewise that in order for the SEC “to approve what I call a full function actively-managed ETF they need to see a demonstration of NAV-based trading.” Gastineau added that this whole process is not going to happen overnight and it will likely take time to get it established. Faust confirmed this saying that he does not expect non-transparent Active ETFs to become a reality in 2011.

At the same time, Faust said that Eaton Vance could well introduce fully transparent active bond ETFs first, if their application for exemptive relief gets approved by the SEC. Transparency is generally not as big of an issue for fixed-income funds compared to equity funds, in the eyes of most market participants.

Disclosure: No positions in above-mentioned names.

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