EQOP – Another First for Natixis

First active, semi-transparent multi-managed ETF breaks new ground

By Nicholas J. Elward

A few months ago EQOP broke new ground in the ETF industry by being one of the first active semi-transparent ETFs and being the first active semi-transparent multi-managed ETF. These firsts are important to investors for many reasons, but a few themes stand out.

  1. Semi-transparent ETFs can provide investors seeking active management the benefits of greater tax efficiency, lower operating costs, intra-day trading and no cash drag, when compared to some active mutual funds.
  2. As the first active multi-managed ETF, EQOP allows for the combination of two well-respected investment firms (Harris Associates and Loomis, Sayles & Company) and two veteran portfolio managers (Bill Nygren and Aziz Hamzaogullari) wrapped into a single product. This combination offers investors the simplicity of a single ETF ticker and a potentially smoother return stream, since investors may gain better diversification with two portfolio managers than with a single-manager investment.
To bring this innovative ETF to market, Natixis needed to figure out how to create a single proxy portfolio comprising the two portfolio managers’ sleeves. This was a very complicated project to operationalize for the issuer, sub-advisors, custodian and the proxy tool provider. But now that the infrastructure and procedures are built and the ETF is live and road-tested, EQOP is paving the way for the launch of other ETFs of this type.

As we think about this new product’s ramifications for the ETF industry, it is important to keep in mind the surge in interest in asset allocation models. EQOP, with its multi-managed structure, is the innovator that now creates a roadmap for an increasing number of issuers to combine sub-advised portfolio manager sleeves into asset allocation models that could be deployed via a single ETF ticker.

Specifically, we feel EQOP will be seen as the catalyst that pushed forward the technical combination of passive, active transparent and now active semi-transparent sleeves, in the convenient structure of a single ETF.
This ETF is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example:

  • You may have to pay more money to trade the ETF’s shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.
  • The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared to other ETFs because it provides less information to traders.
  • These additional risks may be even greater in bad or uncertain market conditions.
  • The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.
The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance. For additional information regarding the unique attributes and risks of the ETF, see below.

ETF General Risk:
Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns.
Active ETF:
Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing.
Equity Securities Risk:
Equity securities are volatile and can decline significantly in response to broad market and economic conditions.
Value Investing Risk:
Value investing carries the risk that a security can continue to be undervalued by the market for long periods of time.
Growth Stocks Risk:
Growth stocks may be more sensitive to market conditions than other equities as their prices strongly reflect future expectations.
Small and Mid-Cap Stocks Risk:
Investments in small and midsize companies can be more volatile than those of larger companies.
Foreign and Emerging Market Securities Risk:
Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
Predatory Trading Practices Risk:
Although the Fund seeks to benefit from keeping its portfolio holdings information secret, market participants may attempt to use the Proxy Portfolio and related Proxy Portfolio Disclosures to identify the Fund’s holdings and trading strategy. If successful, this could result in such market participants engaging in predatory trading practices that could harm the Fund and its shareholders.
Proxy Portfolio Structure Risk:
Unlike traditional ETFs that provide daily disclosure of their portfolio holdings, the Fund does not disclose the daily holdings of the Actual Portfolio. Instead, the Fund discloses a Proxy Portfolio that is designed to reflect the economic exposure and risk characteristics of the Fund’s Actual Portfolio on any given trading day. Although the Proxy Portfolio and Proxy Portfolio Disclosures are intended to provide Authorized Participants and other market participants with enough information to allow them to engage in effective arbitrage transactions that will keep the market price of the Fund’s shares trading at or close to the underlying NAV per share of the Fund, while at the same time enabling them to establish cost-effective hedging strategies to reduce risk, there is a risk that market prices will vary significantly from the underlying NAV of the Fund.
Authorized Participant Concentration Risk:
Only an authorized participant (“Authorized Participant”) may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of institutions that act as Authorized Participants, none of which are or will be obligated to engage in creation or redemption transactions. To the extent that these institutions exit the business or are unable to proceed with creation and/or redemption orders with respect to the Fund and no other Authorized Participant is able to step forward to create or redeem Creation Units, Fund shares may trade at a discount to NAV and possibly face trading halts and/or delisting. The Fund’s novel structure may affect the number of entities willing to act as Authorized Participants, and this risk may be exacerbated during times of market stress.
Trading Issues Risk:
Trading in Fund shares on the NYSE Arca may be halted in certain circumstances. If 10% or more of the Fund’s Actual Portfolio does not have readily available market quotations, the Fund will promptly request that the NYSE Arca halt trading in the Fund’s shares. Such trading halts may have a greater impact on the Fund compared to other ETFs due to its lack of transparency.
Premium/Discount Risk:
The market value of the Fund’s shares will fluctuate, in some cases materially, in response to changes in the Fund’s NAV, the intraday value of the Fund’s holdings, and the relative supply and demand for the Fund’s shares on the exchange. There is a risk (which may increase during periods of market disruption or volatility) that market prices for Fund shares will vary significantly from the Fund’s NAV. This risk may be greater for the Fund than for traditional ETFs that disclose their full portfolio holdings on a daily basis because the publication of the Proxy Portfolio does not provide the same level of transparency as the publication of the full portfolio by a fully transparent active ETF.

Fund is new with a limited operating history.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

Diversification does not guarantee a profit or protect against a loss.

Natixis Distribution, LLC is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.

Natixis Distribution, LLC, Harris Associates L.P. and Loomis, Sayles & Company, L.P. are affiliated.

Before investing, consider the fund's investment objectives, risks, charges, and expenses. You may obtain a prospectus or a summary prospectus containing this and other information. Read it carefully.

ALPS Distributors, Inc. is the distributor of the Natixis U.S. Equity Opportunities ETF. Natixis Distribution, LLC is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, LLC.

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