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May 1, 2013

Exchange-Traded Future

By Tom Steinert-Threlkeld

The major exchange operators are in pitched battle to win market share and build up volume of trading in exchanged-traded funds (" see Cover Story "Fund Fight," p. 16).

With the relaunch of Nasdaq's PSX market, there will now be two national exchanges focused on exchange-traded funds, a once fast-growing segment of business that now accounts for about 14 percent of all equities trading.

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Even that one bright spot in trading volume since the credit crisis has come into hard times, with daily volume falling a third last year, to 941 million shares a day, according to Rosenblatt Securities.

Now comes Eaton Vance, though, with a proposal the Securities and Exchange Commission appears willing to consider, at this point: allowing less frequent disclosure of holdings by exchange-traded funds.

This sponsor of a broad lineup of mutual funds, closed-end funds and separately managed accounts has proposed a new type of fund that is neither mutual fund nor what has been considered an exchange-traded fund, to date.

Eaton Vance has proposed a new category of security called the Exchange-Traded Managed Fund. ETMF. As in ETF and mutual fund.

If it's approved, the whole ballgame between exchange-traded funds and mutual funds changes. And gets played out on exchanges.

To date, ETFs have been the home of passively managed funds, tied to indices, almost exclusively. That's because ETFs, as opposed to mutual funds, are required to disclose their holdings daily.

The mutual fund business is built on active management of holdings, to get an above-average return. And justify management fees charged.

Mutual fund firms only disclose their holdings at the end of each quarter. And like it that way.

"The transparency? We're not going to do that," Chuck Freadhoff, vice president at American Funds Distributors, said earlier this year.

Why? It's like showing your cards to another player, who can just mimic what you do-without doing any original research or betting on their own brains.

With Eaton Vance's proposal, however, ETMFs would only have to disclose their holdings every quarter. Suddenly, any active mutual fund could be rebooted as an exchange-traded fund. With the advantages of both.

Eaton Vance itself says it will relaunch its mutual funds as ETMFs, if it gets the chance. And if all mutual funds are, in effect, forced to follow suit, then equities traders and exchanges might get their hands on some real volume.

Where U.S. investors have placed $1.4 trillion in the past 20 years into ETFs, they have placed $13.5 trillion into mutual funds.

With apologies to long-deceased Senate Minority Leader Everett Dirksen, a trillion here, a trillion there and pretty soon you're talking real money. And volume.

 


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