An Exchange-Traded Managed Fund (ETMF) combines features from two established financial products: mutual funds and exchange-traded funds (ETFs). The ETMF structure bridges the gap between these models, offering active portfolio management within a wrapper that trades on a stock exchange. This hybrid approach addresses specific concerns that traditional active managers had with the fully transparent ETF structure.
Defining the Exchange-Traded Managed Fund Structure
The core structural characteristic of an ETMF is its combination of active management with exchange trading. Like a traditional mutual fund, an ETMF holds an actively managed portfolio where a fund manager makes discretionary decisions on security selection and timing. Mirroring an ETF, the fund’s shares are bought and sold on a stock exchange throughout the trading day using a brokerage account.
The key innovation driving the ETMF structure is its semi-transparency. Unlike standard ETFs, which typically disclose their full portfolio holdings daily, ETMFs do not. This limited disclosure allows active managers to protect their proprietary trading strategies from being copied or front-run. The fund is registered under the Investment Company Act of 1940, but requires exemptive relief from the Securities and Exchange Commission (SEC) to permit the exchange-traded features.
How ETMFs Are Traded and Priced
The trading and pricing mechanism of an ETMF distinctly separates it from a standard ETF. While ETMF shares trade on an exchange throughout market hours, the execution price is not determined by continuous market supply and demand. Instead, ETMFs utilize a system known as Net Asset Value (NAV)-based trading.
When an investor places an order, the transaction is executed at a price directly linked to the fund’s official end-of-day NAV. This is similar to how a traditional mutual fund is priced, where all transactions for the day are processed at the single NAV calculated after the market closes. The final execution price is typically the calculated NAV plus or minus a small, negotiated premium or discount, which accounts for trading costs and market fluctuations.
This NAV-based pricing is a deliberate departure from the continuous pricing of standard ETFs, which can trade at a market price that deviates from their underlying NAV during the day. The ETMF design prevents the intra-day premiums and discounts that can occur with fully transparent exchange-traded products. For investors, this mechanism provides certainty that their transaction will be priced based on the objective value of the fund’s underlying assets at the end of the day.
To facilitate efficient trading without full daily transparency, some ETMF structures employ a “Tracking Basket” or “Proxy Portfolio.” This basket contains a representative selection of the fund’s actual holdings and is disclosed daily. Authorized Participants (APs) use this proxy to facilitate the creation and redemption of shares, helping to keep the ETMF’s market price aligned with its underlying value without revealing the manager’s live trading strategy.
ETMFs Versus ETFs and Mutual Funds
Comparing ETMFs to their predecessors reveals differences across transparency, liquidity, and accessibility. The most notable distinction lies in portfolio transparency: mutual funds and ETMFs typically disclose their holdings quarterly, while standard ETFs publish their full holdings daily. This semi-transparency protects the active manager’s intellectual property.
Regarding liquidity, ETFs and ETMFs both offer the ability to trade shares on an exchange throughout the day, providing intra-day accessibility that traditional mutual funds lack. However, the trading mechanics differ, as an ETF trades continuously at a market-driven price, while an ETMF’s transaction price is set once daily at the end-of-day NAV.
ETMFs benefit from the lower operational expenses associated with the ETF structure, such as eliminating the need for an internal transfer agency. Consequently, they often have lower expense ratios than comparable actively managed mutual funds. This blend of features means an ETMF offers the professional portfolio management and periodic transparency of a mutual fund, packaged with the exchange-traded accessibility and structural efficiency of an ETF.
Accessing Active Management and Tax Advantages
The ETMF structure was primarily created to offer the benefits of active management without the risk of strategy replication. By not requiring daily portfolio disclosure, the structure allows fund managers to employ complex or high-conviction trading strategies. This protection encourages active managers, who were previously hesitant to launch fully transparent ETFs, to transition their strategies into an exchange-traded format.
ETMFs generally share the significant tax advantages of standard ETFs. This tax efficiency stems from the unique “in-kind” creation and redemption mechanism used between the fund and Authorized Participants. When an AP redeems shares, the fund can deliver appreciated securities instead of cash, which minimizes the need for the fund to sell assets and realize capital gains. This process helps avoid the capital gains distributions that often occur in traditional mutual funds, providing greater tax control for investors in taxable brokerage accounts.