Will the ETF’s benchmark or index tracking methodology be altered as part of the conversion, potentially affecting tracking error?

Short answer:

Based on the information released in the Business Wire announcement, there is no indication that the Eaton Vance Mortgage Opportunities ETF (EVMO) will adopt a new benchmark or change its index‑tracking methodology as a result of the conversion from the Morgan Stanley Mortgage Securities Trust mutual fund (MTGDX). Consequently, no new source of tracking error is implied by the conversion itself.

Why the conversion is unlikely to alter the benchmark or methodology

Potential impact on tracking error

• Tracking error definition – The standard deviation of the difference between the ETF’s return and the return of its benchmark (or index) over a period of time.

• Key drivers of tracking error typically include:

  1. Differences between the ETF’s holdings and the benchmark (e.g., cash drag, sampling, or optimization).
  2. Transaction costs (trading, commissions, market impact) incurred when building the ETF from the mutual‑fund portfolio.
  3. Cash flow management (e.g., inflows/outflows that require buying/selling securities).
  4. Differences in fee structures (management fees, operational expenses).

• Effect of a pure conversion – The ETF is launched with the same underlying portfolio that the mutual fund already held. The only “new” elements are:

  • ETF‑specific expenses (e.g., ETF management fee, custody, and exchange‑listing costs). These are generally small relative to the overall expense ratio and are disclosed in the ETF’s prospectus.
  • Operational “one‑time” transaction costs for the “creation” process of the ETF (e.g., creation‑unit purchases, initial cash/holdings alignment). This could cause a very small, short‑term tracking‑error bump (typically a few basis points) but is usually transient and settles after the initial few days of trading.

• Conclusion on tracking error: Because the conversion does not alter the benchmark or the index‑tracking methodology, any change in tracking error will most likely be limited to:

  • Minor, short‑lived adjustments as the ETF’s share class is created and the fund’s cash is invested in the ETF’s creation units.
  • Ongoing, incremental differences that already exist for the underlying mutual‑fund structure (e.g., cash‑drag and expense‑drift), now reflected in the ETF’s expense ratio.

In practical terms, investors should not expect a systematic, long‑term change in tracking error because the underlying investment strategy, portfolio composition, and benchmark remain unchanged. The only effect would be the normal, small tracking‑error “settling” period that typically accompanies any fund conversion.

Bottom line

• No new benchmark or index has been announced.
• No change to the index‑tracking methodology has been disclosed.
• Any tracking‑error impact would be limited to the normal, short‑term “conversion” frictions rather than a fundamental methodological shift.
  

Investors who already own the MTGDX mutual‑fund shares or are considering buying the new EVMO ETF can therefore expect the ETF to behave in line with the original fund’s benchmark, with any tracking‑error changes being minimal and short‑lived.