Exchange-Traded Mutual Funds (ETMFs): A Modern Investment Blend and How They Operate

What Exactly Are Exchange-Traded Mutual Funds (ETMFs)?

Exchange-traded mutual funds, commonly called ETMFs, represent a unique investment vehicle that merges the characteristics of traditional open-end mutual funds with the trading flexibility of exchange-traded funds (ETFs). Sometimes referred to as exchange-traded managed funds, ETMFs provide investors with a novel way to access mutual fund strategies while benefiting from intraday market trading.

Unlike conventional mutual funds that trade only once per day at the net asset value (NAV), ETMFs allow shares to be bought and sold throughout the trading day on stock exchanges, similar to stocks or ETFs. However, their intraday prices are directly tied to the fund’s upcoming end-of-day NAV, with prices quoted as a premium or discount relative to this NAV (for example, NAV + $0.02 or NAV - $0.05). When a trade is executed, the premium or discount is locked in, and the final transaction price is determined once the NAV is calculated at market close.

Key Highlights

• ETMFs are mutual fund shares listed on public exchanges, allowing retail investors to trade them easily on secondary markets.
• Their pricing mechanism links to the next calculated NAV rather than real-time market pricing seen with ETFs.
• Eaton Vance’s NextShares stands out as a pioneering and prominent issuer of ETMFs.

Exploring the Mechanics and Benefits of ETMFs

ETMFs blend the investment approach of actively managed mutual funds with the trading and tax efficiencies typically associated with ETFs. This hybrid structure enables investors to enjoy professional management alongside greater liquidity and transparency.

One distinct advantage of ETMFs over traditional ETFs is their reduced requirement for daily portfolio disclosure, which helps protect sensitive trading strategies. Their NAV-based intraday pricing ensures that trades reflect the fund’s underlying value with premiums or discounts clearly indicated. Additionally, ETMFs use "in-kind" transfers of securities when issuing or redeeming shares, which minimizes transaction costs and enhances tax efficiency.

For traders and speculators, ETMFs offer unique arbitrage opportunities during market hours, while long-term investors benefit from regular dividend payments and potential capital gains distributions.

Investing in ETMFs: A Closer Look at Eaton Vance’s NextShares

In February 2016, Eaton Vance introduced one of the first ETMFs, the Eaton Vance Stock NextShares (EVSTC), which focuses on growth-oriented stocks and is also available as a traditional mutual fund. As of April 2021, EVSTC has delivered an impressive NAV return of approximately 16% since inception. Unlike many ETFs, NextShares are actively managed, aiming to outperform their benchmarks and peers.

Following the success of EVSTC, Eaton Vance’s NextShares has expanded its ETMF offerings to include funds like Floating-Rate NextShares (EVFTC), Global Income Builder NextShares (EVGBC), Oaktree Diversified Credit NextShares (OKDCC), and TABS 5-to-15 Year Laddered Municipal Bond NextShares (EVLMC).

NextShares trade on the Nasdaq exchange just like stocks and ETFs but are priced based on the fund’s next end-of-day NAV adjusted by a trading cost determined at the time of execution, blending liquidity with precise NAV-based valuation.

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