ETMFs unlikely to make a splash in Canada

U.S. asset managers are preparing to launch a product that blends the benefits of mutual funds with those of ETFs. But with different rules in Canada, they’re likely to be unnecessary

By: Tessie Sanci
October 20, 2015 October 20, 2015
15:00

Although financial advisors and other financial professionals in the U.S. are currently awaiting the release of a new type of investment product dubbed an “exchange-traded managed fund” (ETMF), their counterparts here in Canada will likely see no need for the product, according to Deborah Fuhr, managing partner of ETFGI LLP in London, U.K.

The development of ETMFs comes in response to pressure from asset managers who are unhappy with certain exchange-traded fund (ETF) disclosure requirements by the U.S. Securities and Exchange Commission (SEC). The U.S securities regulator mandates that managers of ETFs provide a daily listing of their holdings within their ETFs, said Fuhr, who was speaking at the 2015 Exchange Traded Forum in Thornhill, Ont. on Tuesday.

However, asset managers do not want to give out that type of information, said Fuhr: “If you’re only holding 15 securities [within the ETF], it would be easy for someone to copy what you’re doing if you do it well.”

In response, the SEC’s approved in 2014 the offering of ETMFs, a non-transparent ETF-like product that will trade on an exchange. However, the SEC states these products are not ETFs because they will be priced at the end of the day using the net asset value (NAV), said Fuhr, adding that unlike an ETF, an EMTF will not be allowed to trade during the day

Eaton Vance Management, a Boston-based investment management firm, brought the application forward to the SEC and has stated that it hopes to release its line of ETMFs at the end of this year or early in 2016, said Fuhr.

At this point, there are not any ETMFs listed on an exchange.

However, EMTFs are unlikely to make waves in Canada as ETF disclosure rules are different here, said Fuhr.

“Rules in Canada allow for ETFs to be brought to market with the same level of transparency as mutual funds,” she explained. “The reality is that exchange-traded managed funds are offering the same level of transparency as mutual funds so [Canada already has] the capability of products that don’t have to provide daily transparency.”

However, in the U.S., ETMFs will give product managers and advisors access to an investment product that has the same disclosure requirements of a mutual fund but the same tax and cost benefits of an ETF.

“It offers the tax benefits because there will be some in-kind creation redemption process,” said Fuhr. “And there will be some cost savings because the fund [administration] and transfer fees doing exchange-traded managed funds will be less than [those for] mutual funds.”

Another advantage for U.S. asset managers is that they see products being listed on an exchange as a new distribution channel and providing greater access to more potential investors, she added.