There have been a lot of “next things” in the mutual-fund
industry.
Back in the Internet bubble days, HOLDERs — Holding Company
Depository Receipts — were “the next big thing.” After the initial buzz, they
fizzled out. Then it was “folios,” where investors could basically make
do-it-yourself mutual fund portfolios; it was a terrific concept that got
almost no traction in the real world.
What’s “next” now is a new form of exchange-traded fund that
makes it very easy to offer active management built on the framework of an ETF.
The only thing stopping a tidal wave of new issues has been
the Securities and Exchange Commission, but there’s a growing sense that
the dam will burst soon and that a flood of new active exchange-traded issues
will reach the market by year’s end as a result.
But there’s a real question over whether this next big thing
will actually be big at all.
To see why — and to decide whether you want to get involved
in the new issues or wait for them to prove themselves — you must first get
some background.
ETFs are mutual funds built to trade like stocks, trading
minute-by-minute instead of being priced at the end of the day. Typically,
they’re based on indexes, although there are a few actively managed issues like
PIMCO Total Return, as well as active-index and leveraged issues to say that
active ETFs already are available.
There is also a suite of ETFs offered by the Vanguard
Group that are, effectively, a share class of Vanguard’s traditional
funds, but because Vanguard holds a patent on the process for simply creating
an ETF share class of an existing fund, the rest of the industry has been
unable to follow suit.
ETFs make daily portfolio disclosures — meaning the investor
knows what they own — and typically have lower costs.
Portfolio disclosure, however, is a major impediment to the
creation of active ETFs because many fund managers don’t want the world to know
what’s in their secret sauce.
The SEC is also an impediment, because creating an active
ETF requires special dispensation from the regulatory agency, which has been
tightening up its approvals of late, mostly in the hope of creating a new
standard that all fund firms can use.
T. Rowe Price, BlackRock and Vanguard all are pushing their
own variations, but the most promising take on this is the ETMF, for
“exchange-traded managed fund,” put forward by Navigate Fund Solutions, a
subsidiary of Eaton Vance Management.
ETMFs would offer “NAV-based trading,” where the fund trades
at its end-of-day net asset value — like a traditional fund — eliminating the
need for the daily portfolio disclosure.
Click here
for the full article in the Wall Street Journal’s Market Watch.