The Securities and Exchange Commission has noticed Eaton Vance Corp.’s exemptive order application (Eaton Vance Notice) to offer a novel form of mutual fund that includes certain elements of an exchange-traded fund (ETF) to be called an “exchange traded mutual fund” or “ETMF.” Like all mutual funds, ETMFs will not publish daily disclosures of their portfolio holdings, and their shares will be sold at a price directly linked to their next-determined net asset value (NAV). Like all ETFs, ETMFs will list and trade on a national securities exchange and issue and redeem their shares only in Creation Units at NAV, primarily by exchanging portfolio holdings “in-kind” with authorized participants.  

However, unlike the shares of ETFs that trade intra-day on an exchange at current market prices, shares of ETMFs will trade at end-of-day NAV, plus or minus a premium/discount that may vary throughout during the trading day, and which will be quoted by market makers at a price relative to the ETMF’s end-of-day NAV (e.g., NAV+$0.20/share, NAV-$0.30/share) (see SEC Release 812-31333). Therefore, ETMF investors purchasing or selling shares during the trading day will not be able to do so at current market prices, nor will they know the NAV at the time their orders are placed, but they will know the level of premium/discount that will be fully transparent.  

One interesting aspect of the ETMF structure is that the NAV-based Trading method will preserve portfolio confidentiality, but will not raise the SEC’s concerns stated in its recent denial of the active “non-transparent” ETF structure proposed by Precidian Funds LLC (see: SEC Release 812-14116). Those concerns, especially relating to unjust price discrimination among purchasers, do not occur because all ETMF purchasers will receive a price tied to NAV, plus or minus a disclosed premium or discount. The denial of Precidian Funds LLC’s proposed structure was discussed in Corporate & Financial Weekly Digest dated October 24. 

An intriguing aspect of the Eaton Vance Notice is that the SEC intends to provide relief to future ETMFs, something almost never granted for novel structures; typically the SEC wants to review the actual operation of a novel product before agreeing to permit additional products using the same structure. The future relief was requested, and will be granted, because the sui generis “NAV-based Trading” method will not provide an absolute dollar amount per share until NAV is calculated at the end of the day and, consequently, exchanges and brokers will be required to install new trading systems to facilitate the purchase and sale of ETMF shares.