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Exchange-Traded Mutual Funds (ETMFs) Explained: Features, Benefits, and Market Outlook

Last updated 03/20/2024 by

Abi Bus

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Exchange-traded mutual funds (ETMFs) are a hybrid between an exchange-traded fund (ETF) and an open-end mutual fund, offering investors the benefits of both. This article explores what ETMFs are, how they work, their advantages, and considerations for investors.

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What is an exchange-traded mutual fund (ETMF)?

An exchange-traded mutual fund (ETMF) is an exchange-traded security that is a hybrid between an exchange-traded fund (ETF) and an open-end mutual fund. It may also be known as an exchange-traded managed fund.

Understanding Exchange-Traded Mutual Funds

An exchange-traded mutual fund is essentially a mutual fund available in the guise of an ETF. Exchange-traded mutual funds offer the benefits of both mutual funds and ETFs. They can combine the advantages of investment strategies of an actively managed mutual fund and the performance and tax efficiencies of an ETF.

ETMF Investing

Eaton Vance offered one of the first ETMFs in February 2016, Eaton Vance Stock NextShares (EVSTC). EVSTC invests in growth stocks and is also offered as a mutual fund, the Eaton Vance Stock Fund. As of April 2021, EVSTC reports a since inception NAV return of around 16%. Different from most ETFs, NextShares are actively managed and seek to exceed the returns of their performance benchmark and peer funds.

How do Exchange-Traded Mutual Funds Work?

Exchange-traded mutual funds differ from a traditional ETF in many ways. They are not required to disclose their portfolio holdings on a daily basis, enabling them to protect confidential portfolio trading details. The funds trade in real time using NAV-based trading with prices quoted in terms of premium or discount. Exchange-traded mutual funds utilize “in-kind” transfers of portfolio securities in redeeming and issuing fund units, thereby saving on transaction costs.

ETMF Trading and Pricing

ETMF intraday trading prices are directly linked to the fund’s next end-of-day NAV. All bids, offers, and trade prices are quoted in terms of premium or discount to the end-of-day NAV (like NAV+$0.02 or NAV-$0.05). For each trade, the premium or discount to NAV is locked in at trade execution time, and the final transaction price is determined once NAV is calculated at the end of the day.
Here is a list of the benefits and the drawbacks to consider.
  • Offers intraday trading like ETFs
  • Combines benefits of mutual funds and ETFs
  • Can provide arbitrage and speculation opportunities
  • Not as transparent as traditional ETFs
  • May have higher fees compared to some ETFs

Frequently asked questions

Are ETMFs actively managed?

Yes, ETMFs can be actively managed, unlike traditional ETFs which are typically passively managed.

How are ETMFs priced?

ETMF prices are linked to the fund’s next daily NAV, rather than being determined in the market at the time of trade execution.

Can investors buy and sell ETMFs on the secondary market?

Yes, ETMFs are listed on exchanges, allowing ordinary investors to buy and sell them on the secondary market.

Do ETMFs have lower transaction costs compared to traditional mutual funds?

ETMFs can potentially have lower transaction costs compared to traditional mutual funds due to their use of “in-kind” transfers of portfolio securities.

How do ETMFs differ from traditional mutual funds?

Traditional mutual funds typically price their shares once a day at the end of the trading day, while ETMFs trade on exchanges throughout the day. Additionally, ETMFs may not disclose their portfolio holdings daily, unlike traditional mutual funds.

Are ETMFs more tax-efficient compared to traditional mutual funds?

ETMFs may offer potential tax efficiency through in-kind transfers of portfolio securities, which can reduce capital gains distributions. However, investors should consult with tax professionals to assess the tax implications based on individual circumstances.

What are the risks associated with investing in ETMFs?

Some risks of investing in ETMFs include lack of transparency in portfolio holdings, market liquidity fluctuations impacting execution prices, and potential tracking errors between ETMF prices and NAV. Investors should carefully consider these factors before investing.

How do I buy and sell ETMF shares?

Investors can buy and sell ETMF shares through brokerage accounts, similar to trading stocks or ETFs. ETMF shares trade on stock exchanges during regular trading hours, providing liquidity and flexibility for investors.

Key takeaways

  • Exchange-traded mutual funds (ETMFs) combine features of both mutual funds and ETFs.
  • ETMF prices are linked to the fund’s next daily NAV.
  • ETMFs can be actively managed and offer intraday trading opportunities.
  • Investors should consider the pros and cons of ETMFs before investing.

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