Investors now have another option when they are shopping for ETFs, but will it serve in their best interest? Yesterday, the Securities and Exchange Commission gave the green light on Eaton Vance Corp (NYSE:EV)’s new ETF product that would allow the company to not have to disclose its holdings to investors. The so-called nontransparent ETF will act and trade just like a normal ETF product, but with the added feature of not having to disclose stock holdings. Eaton Vance is the first fund company to have these types of funds approved by regulators, and they announced that there will be 18 different funds that would fall under the nontransparent ETF structure. Companies that are in the fund business often complain that while ETFs are gaining steam and popularity, there is a disadvantage to the fund because competitors are able to go through the holdings and mimic holdings of other funds.
SEC ruling represents a growth avenue for Eaton Vance
However, this ruling represents a growth avenue for Eaton Vance Corp (NYSE:EV), who is able to sell the license for the nontransparent structured ETF and collect a fee from other fund companies that want to use that structure of ETF. It has been said that the new nontransparent ETFs will be in a new category called “NextShares”. Management calls the ruling a victory for investors who will now be able to get the true advantages of an ETF without copy funds replicating holdings.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
The ETF industry has really been a huge innovative product for retirement investors, value investors, and just regular investors who want to diversify without being charged huge fees and commissions. ETFs continue to see higher inflows, while actively managed mutual funds are slowly withering away due to their high costs and inflexibility.
Nontransparent ETF structure to help Eaton Vance
However, while the new nontransparent ETF structure will help Eaton Vance Corp (NYSE:EV) keep its strategies and holdings secret, will this help individual investors? Part of ETF due diligence is going through holdings and making sure there is good diversification, good solid companies, and good number of holdings to limit spikes. Investors will now be forced to go off of faith and good will as holdings are blocked from view. However, these ETFs, down the road, could help really separate performance amongst the big ETF firms and could be a better indicator for investors that this company’s nontransparent ETFs are outperforming this other company’s ETFs, etc. However, that could take years before enough performance and results have been generated to be able to compare and contrast with other funds of the same setup. The bottom line here is that we often see new financial products during long period bull markets, such as the one we have been in, but investors must continue to stick to their due diligence and common sense when investing in financial products.