Eaton Vance Announces Filing of Exemptive Application to Permit the Offering of ETFs Utilizing the Clearhedge™ Method of Supporting Efficient Secondary Market Trading
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PR Newswire
BOSTON, Feb. 20, 2019
BOSTON, Feb. 20, 2019 /PRNewswire/ -- Eaton Vance Corp. (NYSE: EV) today announced that Eaton Vance Management, a wholly-owned subsidiary, and Eaton Vance Exchange-Traded Fund Trust (together, the Applicants) have filed an application with the U.S. Securities and Exchange Commission seeking exemptive relief to permit the offering of exchange-traded funds (ETFs) that would employ a novel method of supporting efficient secondary market trading of fund shares (the Clearhedge™ Method). Because disclosure of current holdings would not be necessary, an ETF's portfolio trading activity could remain confidential.
As proposed, ETFs utilizing the Clearhedge Method would (i) publicly disclose prior to the beginning of U.S. market trading each business day a "NAV Reference Portfolio" generally consisting of liquid market instruments trading throughout U.S. market hours whose performance the ETF's adviser expects to be highly correlated with the performance of the ETF's actual portfolio; and (ii) provide for market makers and other arbitrageurs active in the ETF's shares to enter into "NAV Hedge Completion Swap" transactions with the ETF, whereby the ETF and arbitrageur counterparty would exchange payments based on the relative total returns of a reference amount of the ETF's actual portfolio and the NAV Reference Portfolio. Applicants believe that, by varying the size and direction of its NAV Reference Portfolio and NAV Hedge Completion Swap positions as it changes its positions in ETF shares intraday, an arbitrageur could manage its inventory risk in the ETF's shares with substantially the same precision as if it knew the ETF's current portfolio holdings.
ETFs that include foreign or less-liquid instruments in their creation and redemption baskets could use the Clearhedge Method to further facilitate efficient share arbitrage by enabling arbitrageurs to reduce the market risk they experience over the time interlude between the ETF's NAV calculation time and the basket instruments' active trading hours. In this regard, the ETF would disseminate "Basket Instrument Reference Portfolios" and provide for arbitrageurs to enter into "Basket Instrument Hedge Completion Swap" transactions in which the ETF and arbitrageur counterparty would exchange payments based on the relative total returns of specified basket instruments and a designated Basket Instrument Reference Portfolio, which would generally consist of market instruments trading at the U.S. market close and during active trading hours of the basket instruments whose aggregate performance the ETF's adviser expects to be correlated with the performance of the specified basket instruments.
Using the Clearhedge Method, Applicants believe arbitrageurs would be able to hedge the market risk of their positions in ETF shares and basket instruments used in creations and redemptions within close tolerance levels across all types of ETFs and over varying market conditions. Accordingly, Applicants expect ETFs utilizing the Clearhedge Method to demonstrate secondary market trading performance that is superior to many similarly invested ETFs that provide daily holdings disclosure, especially ETFs holding foreign or less-liquid investments, while maintaining the confidentiality of the ETF's current portfolio trading activity. As an additional potential advantage, Applicants expect ETFs utilizing the Clearhedge Method to provide greater transparency of investor trading costs than offered by existing ETFs.
In conjunction with filing the Clearhedge Method exemptive application, Eaton Vance has formed a new wholly-owned subsidiary, Advanced Fund Solutions LLC (AFS), to manage the development and commercialization of ETFs utilizing the Clearhedge Method and other fund-related intellectual property. NextShares Solutions LLC (NextShares Solutions), developer of NextShares™ exchange-traded managed funds (NextShares), will become a subsidiary of AFS, and NextShares Solutions' President Stephen W. Clarke will also serve as president of AFS. Mr. Clarke will continue reporting to Thomas E. Faust Jr., Chairman and Chief Executive Officer of Eaton Vance.
Aspects of the Clearhedge Method are subject to U.S. Patent 10,102,573 and pending patent applications. Through licensing and services arrangements, Eaton Vance and AFS seek to make the Clearhedge Method broadly available across the ETF industry, supporting both actively managed and index-based ETFs.
"We believe the Clearhedge Method could benefit ETF investors by lowering the costs they pay to buy and sell shares, mitigating the performance impact of front-running of fund trades and facilitating the introduction of proprietary active strategies not currently available as ETFs," said Mr. Faust. "Through innovation, we seek to better serve investors."
"We are pleased to extend our development activities within exchange-traded products into the large and growing ETF market," said Mr. Clarke. "As we continue to support NextShares, we look forward to introducing the Clearhedge Method across the ETF landscape."
Eaton Vance provides advanced investment strategies and wealth management solutions to forward-thinking investors around the world. Through principal investment affiliates Eaton Vance Management, Parametric, Atlanta Capital, Hexavest and Calvert, the Company offers a diversity of investment approaches, encompassing bottom-up and top-down fundamental active management, responsible investing, systematic investing and customized implementation of client-specified portfolio exposures. As of December 31, 2018, Eaton Vance had consolidated assets under management of $423.1 billion. Exemplary service, timely innovation and attractive returns across market cycles have been hallmarks of Eaton Vance since 1924. For more information, visit eatonvance.com.
The information contained herein is provided for informational purposes only and does not constitute a solicitation of an offer to buy or sell any security, investment product or service.
Statements in this press release that are not historical facts are "forward-looking statements" as defined by the U.S. securities laws. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to uncertainties and other factors that could cause actual results to differ materially from those set forth.
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