The advent of Non-Transparent ETFs

ETF Darwinism: Theory of ETF Evolution – From small beginnings to a prosperous present, and from a prosperous present onwards….

Deutsche Bank  Markets Research – Sebastian Mercado Strategist

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What is an ETF?
ETFs are open-ended funds which are listed on an exchange and offer intra-day dual liquidity to access diversified investments in a transparent, cheap, and tax efficient way.

The ETF fund structure is a fund structure technology
We believe  that  one way to think of ETFs is as a fund structure technology, therefore ETFs can be seen as the natural evolution of the fund industry, similar to what color TV was to black & white TV. However, their success has not only been due to their technological  advantages, but most importantly because of the new value propositions that have been created around ETFs. Core to its efficient functionality has been the “in-kind” creation/redemption process.  

What is a Non-Transparent ETF?
Non-Transparent ETFs are the  latest attempt from the traditional active asset management industry to access the growing ETF industry. A non-transparent ETF seeks to overcome the limitations of Active ETFs which require managers to disclose their portfolio holdings on a daily basis, while still retaining some of the tax advantages of the ETF structure and trading capabilities.  There have already been a few proposals for Non-transparent ETFs presented by asset managers such as BlackRock, Precidian investments, and Eaton Vance. Most recently, the SEC approved the proposal of Eaton Vance to introduce a new type of investment company called Exchange Traded Managed Fund (ETMF).

The recent Eaton Vance proposal approval has a potential to be a game changer for mutual funds, but not for ETFs
The recent Eaton Vance’s SEC approval to offer  ETMFs  is definitely a significant development within the non-transparent ETF space. However  it is not equal to a sure formula for success. ETMFs are not ETFs, and we do not believe that they will be competing against ETFs. Actually we believe that ETMFs will be competing directly with traditional active mutual funds, against which they would offer significant tax advantages. Although we believe that eventually traditional active mutual funds should migrate and evolve towards more efficient structures such as ETMFs, we do not believe that a new structure will solve all of the main structural issues affecting the active mutual fund  industry  such as high costs and underperformance relative to passive benchmarks.


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