Correspondence 0001133228-22-007176 from Morgan Stanley ETF Trust (CIK 0001676326)
Morgan Stanley ETF Trust (CIK 0001676326)
Date: Nov. 17, 2022 · CIK: 0001676326 · Accession: 0001133228-22-007176
AI Filing Summary & Sentiment
File numbers found in text: 811-23820
Letter
Securities and Exchange Commission Washington, D.C. 20549 Attention: Michael Rosenberg, Division of Investment Management Re: Morgan Stanley ETF Trust (the “Trust”) (File Nos. 033-23166; 811-23820)
Dear Mr. Rosenberg:
Thank you for your comments regarding the Trust’s initial registration statement on Form N-1A relating to six initial series of the Trust: Calvert International Responsible Index ETF, Calvert US Large-Cap Core Responsible Index ETF, Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF, Calvert US Mid-Cap Core Responsible Index ETF (each, a “Responsible Index Fund” and, collectively, the “Responsible Index Funds”), Calvert US Select Equity ETF and Calvert Ultra Short Investment Grade ETF (each, a “Fund,” and collectively, the “Funds”), filed with the Securities and Exchange Commission (the “Commission” or “SEC”) on August 16, 2022.
The Trust has considered your comments and has authorized us to make the responses, changes and acknowledgements discussed below relating to the Trust’s registration statement on its behalf. Below, we describe the changes made to the registration statement in response to the Commission staff’s comments and provide any responses to or any supplemental explanations of such comments, as requested. These changes are expected to be reflected in Pre-Effective Amendment No. 1 (the “Amendment”) to the Trust’s registration statement on Form N-1A, which will be filed via EDGAR on or about November 17, 2022. Capitalized terms not otherwise defined herein have the meanings ascribed to them in the initial registration statement.
GENERAL COMMENTS RELATING TO EACH RESPONSIBLE INDEX FUND
Comment 1. Please disclose for each Responsible Index Fund a policy stating that the Fund will invest at least 80% of its assets in the type of investment suggested by its name (i.e., responsible, diversity, equity and inclusion) as discussed below under each applicable Fund. See Rule 35d-1(a)(2)(i) under the 1940 Act. Additionally, please elaborate on the meaning of “responsible” in the context of the Funds’ names and investment strategy.
Response 1. The Trust respectfully declines to add the requested disclosure and believes the existing disclosure complies with the requirements of Rule 35d-1 under the Investment Company Act of 1940, as amended (the “1940 Act”). Rule 35d-1 currently requires, in pertinent part, that a fund with a “name suggesting that the [f]und focuses its investments in a particular type of investment or investments, or in investments in a particular industry or group of industries” adopt a policy “to invest, under normal circumstances, at least 80% of the value of its [net assets, plus the
amount of any borrowings for investment purposes] in the particular type of investments, or in investments in the particular industry or industries, suggested by the [f]und’s name[.]”
In adopting Rule 35d-1, the SEC stated that “the rule does not apply to fund names that incorporate terms that connote types of investment strategies (such as the terms ‘growth’ and ‘value’) as opposed to types of investments.” Investment Company Names, SEC Rel. No. IC-24828 (Jan. 17, 2001). Moreover, in a set of “Frequently Asked Questions about Rule 35d-1 (Investment Company Names),” the SEC staff further distinguished certain terms that suggest an investment objective or strategy, rather than a type of investment, and noted that such terms do not require an 80% investment policy pursuant to Rule 35d-1.1 Frequently Asked Questions about Rule 35d-1 (Investment Company Names), modified Dec. 4, 2001.
Consistent with the foregoing, the Trust believes that “Responsible” or “Diversity, Equity and Inclusion” in a Fund’s name connotes the Fund’s strategy to select investments that are consistent with such Fund’s responsible investment criteria. Each Responsible Index Fund follows the Calvert Principles for Responsible Investment, which is an investment framework for identifying companies and other issuers that provide positive leadership in the areas of their business operations and overall activities that are material to improving long-term shareholder value and societal outcomes. The Calvert ESG research process focuses on identifying financially material ESG risks and opportunities to which issuers are exposed, evaluating management teams’ ability to navigate those risks, and recognizing opportunities for companies to improve their ESG performance.
We further note that each Responsible Index Fund has a policy to invest at least 80% of its net assets (plus any borrowings for investment purposes) in securities included in the index that each such Fund seeks to track.
Comment 2. Each Responsible Index Fund should more clearly explain and/or summarize in the summary prospectus the Calvert Principles for Responsible Investment (the “Calvert Principles”) and how those principles define “ESG” and the Fund’s specific ESG area(s) of focus.
Response 2. The following disclosure has been added to each Responsible Index Fund’s prospectus in the sections entitled “Fund Summary—Principal Investment Strategy” and “Details of the Fund—Process” (additions denoted in bold and underline):
The Index is composed of common stocks of large companies in developed markets, excluding the U.S., that operate their businesses in a manner consistent with the Calvert Principles for Responsible Investment (the “Calvert Principles”). Large companies in developed markets include 1,000 large publicly traded companies, excluding real estate investments trusts and business development companies, in markets that Calvert Research and Management (“Calvert”), the Index provider, determines to be developed markets based on a set of criteria including level of economic development, existence of capital controls, openness to foreign direct investment, market trading and liquidity conditions, regulatory
1 The Trust acknowledges that the SEC has recently proposed, but not yet adopted, amendments to Rule 35d-1 that would expand the scope of fund names subject to the 80% investment policy requirement. Investment Company Names, SEC Rel. No. IC-34593 (May 25, 2022).
environment, treatment of minority shareholders, and investor expectations. When determining 1,000 large publicly traded companies, Calvert generally includes the 500 largest publicly traded companies located in or tied economically to Europe and the 500 largest publicly traded companies located in or tied economically to other non-U.S. and non-European developed markets. The Calvert Principles (a copy of which is included as an appendix to the Fund’s prospectus) serve as a framework for considering environmental, social and governance (“ESG”) factors. Under this framework, Calvert seeks to identify companies and other issuers that provide positive leadership in the areas of their operations and overall activities that are material to improving long-term shareholder value and societal outcomes, including environmental, social and governance (“ESG”) areas such as: environmental sustainability and resource efficiency; equitable societies and respect for human rights; and accountable governance and transparency.
Comment 3. Please summarize the criteria the applicable Index uses in determining what issuers are considered to have ESG characteristics, consistent with its chosen ESG definition/focus. The disclosure should include whether the index selects its components by reference to, for example: 1) ESG scores or data from a third-party rating organization; (2) a proprietary screen and the factors the screen applies; or (3) a combination of the above methods. Each Fund should also describe its due diligence practices in applying its screening criteria to portfolio companies (e.g., does it perform its own independent analysis of issuers, or does it rely exclusively on the Index?). Lastly, disclose (1) whether a fund’s ESG criteria are applied to every investment it makes, or only to some of its investments; and (2) whether ESG is the exclusive factor considered, or whether it is one of several factors.
Response 3. The following disclosure has been added to each Responsible Index Fund’s prospectus in the section entitled “Details of the Fund”:
The Calvert Principles provide a framework for Calvert’s evaluation of investments and guide Calvert’s stewardship on behalf of clients through active engagement with issuers. For example, Calvert may seek to engage directly with company management to gain insights on sustainability alignment and material ESG criteria that may affect long-term financial performance. Although Calvert may reference third-party ESG data during its research process, it generally does not rely on third-party ESG data for the purposes of constructing the Index. Calvert also does not use screens in connection with constructing the Index. Instead, Calvert relies on its own proprietary analysis described further below to determine whether a company operates its business in a manner consistent with the Calvert Principles.
The Calvert ESG research process focuses on identifying the financially material ESG risks to which companies and other issuers (together, “issuers”) are exposed, evaluating management teams’ ability to navigate those risks, and recognizing opportunities for companies to improve their ESG performance. Calvert reviews
data points to differentiate issuers based on such risks. Then, Calvert quantifies these risks using a proprietary scoring model that rates and ranks issuers within their peer groups. The end result is a customized scoring model that rates and ranks companies, including a proprietary assessment relative to both peer and absolute performance. In some cases and at its discretion, Calvert performs a qualitative review in lieu of scoring a particular issuer.
The following disclosure has been added to each Responsible Index Fund’s prospectus in the section entitled “Details of the Fund” with the exception of Calvert International Responsible Index ETF:
The Fund seeks to replicate the performance of the Index and seeks to hold Index component companies in approximately the same proportion as the Index, subject to certain regulatory requirements. Thus, the Fund does not perform diligence on companies held in its portfolio and does not have its own ESG criteria. The Index’s rules and methodology (available on the Calvert website) describes the relevant eligibility criteria and selection methodology for Index components, which include, as described above, that each Index component must operate its business in a manner consistent with the Calvert Principles, among other factors, such as market capitalization and liquidity thresholds.
The following disclosure will be added to Calvert International Responsible Index ETF’s prospectus in the section entitled “Details of the Fund”:
The Fund seeks to track the performance of the Index and seeks to hold a representative sample number of Index component companies so that it will resemble the Index in terms of key risk and other characteristics, subject to certain regulatory requirements. Thus, the Fund does not perform diligence on companies held in its portfolio and does not have its own ESG criteria. The Index’s rules and methodology (available on the Calvert website) describes the relevant eligibility criteria and selection methodology for Index components, which include, as described above, that each Index component must operate its business in a manner consistent with the Calvert Principles, among other factors, such as market capitalization and liquidity thresholds.
In addition, the following disclosure will be added to the SAI:
As described in the Funds’ prospectus, each Fund may invest in cash, money market instruments and ETFs for various portfolio management purposes. Such investments will generally not be subject to responsible investment analysis and will not be required to be consistent with the responsible investment criteria otherwise applicable to investments made by the Fund or components of the Index the Fund seeks to track, as applicable. In addition, ETFs in which a Fund may invest may hold securities of issuers that do not operate in accordance with the Fund’s responsible investment criteria.
ADDITIONAL COMMENTS APPLICABLE TO EACH RESPONSIBLE INDEX FUND
Principal Investment Strategies
Comment 4. Please state whether the underlying index is currently concentrated and, if so, disclose the specific industry or group of industries in which the underlying index is concentrated. Please also add the corresponding risks of investments in such industry or group of industries to the Principal Risks section.
Response 4. As of September 30, 2022, two of the underlying indexes were concentrated in the information technology sector. Accordingly, corresponding disclosures will be added to the Principal Investment Strategies and Principal Risks of the relevant Funds.
Comment 5. Please provide a range of the number of companies in the applicable Index.
Response 5. The disclosure will be revised accordingly in the Amendment.
Principal Investment Risks
Comment 6. Please order the risks to prioritize the risks that are most likely to adversely affect the Fund’s net asset value, yield and total return. Please note that after listing the most significant risks to the fund, the remaining risks may be alphabetized. See ADI 2019-08 - Improving Principal Risks Disclosure.
Response 6. We respectfully acknowledge the comment, but we believe that the current presentation of each Fund’s principal risks is responsive to Item 4 of Form N-1A. The present ordering of risks accurately summarizes the principal risks of investing in each Fund, including the risks to which the Fund’s portfolio as a whole is subject and the circumstances reasonably likely to adversely affect the Fund’s net asset value, yield, and total return. We believe that ordering risks with those most likely to adversely affect a Fund’s net asset value, yield and total return first would be prone to subjectivity and could become misleading over time, obscuring the risks to investors. Accordingly, we respectfully decline to implement changes in response to this comment at this time.
Comment 7. Under Foreign Securities risk, please consider having a separate risk factor for Foreign Currency Transactions.
Response 7. We respectfully acknowledge the comment, however, we believe the current disclosure is adequate. We note that the prospectus includes disclosure regarding “Foreign Currency” and “Foreign Currency Forward Exchange Contracts,” in addition to “Foreign Securities” and “Foreign Investing” risks. Furthermore, we note that the Funds’ SAI also includes disclosure regarding “Foreign Currency Transactions.”
Comment 8. Under Trading Risk, please disclose the consequence to buyers and sellers of Fund Shares trading at a premium or discount to NAV (i.e., that an investor may pay more for, or receive less than, the underlying value of the Shares). Please also disclose that, where all or a portion
of the ETF’s underlying securities trade in a market that is closed when the market in which the ETF’s shares are listed and trading in that market is open, there may be changes between the last quote from its closed foreign market and the value of such security during the ETF’s domestic trading day. In addition, please note that this
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November 17, 2022
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Attention: Michael Rosenberg, Division of Investment
Management
Re: Morgan Stanley ETF Trust (the “Trust”)
(File Nos. 033-23166; 811-23820)
Dear Mr. Rosenberg:
Thank you for your comments
regarding the Trust’s initial registration statement on Form N-1A relating to six initial series of the Trust: Calvert International
Responsible Index ETF, Calvert US Large-Cap Core Responsible Index ETF, Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF,
Calvert US Mid-Cap Core Responsible Index ETF (each, a “Responsible Index Fund” and, collectively, the “Responsible
Index Funds”), Calvert US Select Equity ETF and Calvert Ultra Short Investment Grade ETF (each, a “Fund,” and collectively,
the “Funds”), filed with the Securities and Exchange Commission (the “Commission” or “SEC”) on August
16, 2022.
The Trust has considered
your comments and has authorized us to make the responses, changes and acknowledgements discussed below relating to the Trust’s
registration statement on its behalf. Below, we describe the changes made to the registration statement in response to the Commission
staff’s comments and provide any responses to or any supplemental explanations of such comments, as requested. These changes are
expected to be reflected in Pre-Effective Amendment No. 1 (the “Amendment”) to the Trust’s registration statement on
Form N-1A, which will be filed via EDGAR on or about November 17, 2022. Capitalized terms not otherwise defined herein have the meanings
ascribed to them in the initial registration statement.
GENERAL COMMENTS RELATING
TO EACH RESPONSIBLE INDEX FUND
Comment 1.
Please disclose for each Responsible Index Fund a policy stating that the Fund will invest at least 80% of its assets in the type of investment suggested by its name (i.e., responsible, diversity, equity and inclusion) as discussed below under each applicable Fund. See Rule 35d-1(a)(2)(i) under the 1940 Act. Additionally, please elaborate on the meaning of “responsible” in the context of the Funds’ names and investment strategy.
Response 1. The Trust respectfully declines to add the requested disclosure and believes the existing disclosure complies with the requirements of Rule 35d-1 under the Investment Company Act of 1940, as amended (the “1940 Act”). Rule 35d-1 currently requires, in pertinent part, that a fund with a “name suggesting that the [f]und focuses its investments in a particular type of investment or investments, or in investments in a particular industry or group of industries” adopt a policy “to invest, under normal circumstances, at least 80% of the value of its [net assets, plus the
amount of any borrowings for investment purposes] in the particular type of investments, or in investments in the particular industry or industries, suggested by the [f]und’s name[.]”
In adopting Rule 35d-1, the SEC stated that “the rule does not apply to fund names that incorporate terms that connote types of investment strategies (such as the terms ‘growth’ and ‘value’) as opposed to types of investments.” Investment Company Names, SEC Rel. No. IC-24828 (Jan. 17, 2001). Moreover, in a set of “Frequently Asked Questions about Rule 35d-1 (Investment Company Names),” the SEC staff further distinguished certain terms that suggest an investment objective or strategy, rather than a type of investment, and noted that such terms do not require an 80% investment policy pursuant to Rule 35d-1.1 Frequently Asked Questions about Rule 35d-1 (Investment Company Names), modified Dec. 4, 2001.
Consistent with the foregoing, the Trust believes that “Responsible” or “Diversity, Equity and Inclusion” in a Fund’s name connotes the Fund’s strategy to select investments that are consistent with such Fund’s responsible investment criteria. Each Responsible Index Fund follows the Calvert Principles for Responsible Investment, which is an investment framework for identifying companies and other issuers that provide positive leadership in the areas of their business operations and overall activities that are material to improving long-term shareholder value and societal outcomes. The Calvert ESG research process focuses on identifying financially material ESG risks and opportunities to which issuers are exposed, evaluating management teams’ ability to navigate those risks, and recognizing opportunities for companies to improve their ESG performance.
We further note that each Responsible Index Fund has a policy to invest at least 80% of its net assets (plus any borrowings for investment purposes) in securities included in the index that each such Fund seeks to track.
Comment 2.
Each Responsible Index Fund should more clearly explain and/or summarize in the summary prospectus the Calvert Principles for Responsible Investment (the “Calvert Principles”) and how those principles define “ESG” and the Fund’s specific ESG area(s) of focus.
Response 2. The following disclosure has been added to each Responsible Index Fund’s prospectus in the sections entitled “Fund Summary—Principal Investment Strategy” and “Details of the Fund—Process” (additions denoted in bold and underline):
The Index is composed of common stocks of large companies in developed markets, excluding the U.S., that operate their businesses in a manner consistent with the Calvert Principles for Responsible Investment (the “Calvert Principles”). Large companies in developed markets include 1,000 large publicly traded companies, excluding real estate investments trusts and business development companies, in markets that Calvert Research and Management (“Calvert”), the Index provider, determines to be developed markets based on a set of criteria including level of economic development, existence of capital controls, openness to foreign direct investment, market trading and liquidity conditions, regulatory
1 The Trust acknowledges that the SEC has recently proposed, but not yet adopted, amendments
to Rule 35d-1 that would expand the scope of fund names subject to the 80% investment policy requirement. Investment Company Names, SEC
Rel. No. IC-34593 (May 25, 2022).
2
environment, treatment of minority shareholders, and investor expectations. When determining 1,000 large publicly traded companies, Calvert generally includes the 500 largest publicly traded companies located in or tied economically to Europe and the 500 largest publicly traded companies located in or tied economically to other non-U.S. and non-European developed markets. The Calvert Principles (a copy of which is included as an appendix to the Fund’s prospectus) serve as a framework for considering environmental, social and governance (“ESG”) factors. Under this framework, Calvert seeks to identify companies and other issuers that provide positive leadership in the areas of their operations and overall activities that are material to improving long-term shareholder value and societal outcomes, including environmental, social and governance (“ESG”) areas such as: environmental sustainability and resource efficiency; equitable societies and respect for human rights; and accountable governance and transparency.
Comment 3.
Please summarize the criteria the applicable Index uses in determining what issuers are considered to have ESG characteristics, consistent with its chosen ESG definition/focus. The disclosure should include whether the index selects its components by reference to, for example: 1) ESG scores or data from a third-party rating organization; (2) a proprietary screen and the factors the screen applies; or (3) a combination of the above methods. Each Fund should also describe its due diligence practices in applying its screening criteria to portfolio companies (e.g., does it perform its own independent analysis of issuers, or does it rely exclusively on the Index?). Lastly, disclose (1) whether a fund’s ESG criteria are applied to every investment it makes, or only to some of its investments; and (2) whether ESG is the exclusive factor considered, or whether it is one of several factors.
Response 3. The following disclosure has been added to each Responsible Index Fund’s prospectus in the section entitled “Details of the Fund”:
The Calvert Principles provide a framework for Calvert’s evaluation of investments and guide Calvert’s stewardship on behalf of clients through active engagement with issuers. For example, Calvert may seek to engage directly with company management to gain insights on sustainability alignment and material ESG criteria that may affect long-term financial performance. Although Calvert may reference third-party ESG data during its research process, it generally does not rely on third-party ESG data for the purposes of constructing the Index. Calvert also does not use screens in connection with constructing the Index. Instead, Calvert relies on its own proprietary analysis described further below to determine whether a company operates its business in a manner consistent with the Calvert Principles.
The Calvert ESG research process focuses on identifying the financially material ESG risks to which companies and other issuers (together, “issuers”) are exposed, evaluating management teams’ ability to navigate those risks, and recognizing opportunities for companies to improve their ESG performance. Calvert reviews
3
data points to differentiate issuers based on such risks. Then, Calvert quantifies these risks using a proprietary scoring model that rates and ranks issuers within their peer groups. The end result is a customized scoring model that rates and ranks companies, including a proprietary assessment relative to both peer and absolute performance. In some cases and at its discretion, Calvert performs a qualitative review in lieu of scoring a particular issuer.
The following disclosure has been added to each Responsible Index Fund’s prospectus in the section entitled “Details of the Fund” with the exception of Calvert International Responsible Index ETF:
The Fund seeks to replicate the performance of the Index and seeks to hold Index component companies in approximately the same proportion as the Index, subject to certain regulatory requirements. Thus, the Fund does not perform diligence on companies held in its portfolio and does not have its own ESG criteria. The Index’s rules and methodology (available on the Calvert website) describes the relevant eligibility criteria and selection methodology for Index components, which include, as described above, that each Index component must operate its business in a manner consistent with the Calvert Principles, among other factors, such as market capitalization and liquidity thresholds.
The following disclosure will be added to Calvert International Responsible Index ETF’s prospectus in the section entitled “Details of the Fund”:
The Fund seeks to track the performance of the Index and seeks to hold a representative sample number of Index component companies so that it will resemble the Index in terms of key risk and other characteristics, subject to certain regulatory requirements. Thus, the Fund does not perform diligence on companies held in its portfolio and does not have its own ESG criteria. The Index’s rules and methodology (available on the Calvert website) describes the relevant eligibility criteria and selection methodology for Index components, which include, as described above, that each Index component must operate its business in a manner consistent with the Calvert Principles, among other factors, such as market capitalization and liquidity thresholds.
In addition, the following disclosure will be added to the SAI:
As described in the Funds’ prospectus, each Fund may invest in cash, money market instruments and ETFs for various portfolio management purposes. Such investments will generally not be subject to responsible investment analysis and will not be required to be consistent with the responsible investment criteria otherwise applicable to investments made by the Fund or components of the Index the Fund seeks to track, as applicable. In addition, ETFs in which a Fund may invest may hold securities of issuers that do not operate in accordance with the Fund’s responsible investment criteria.
4
ADDITIONAL COMMENTS
APPLICABLE TO EACH RESPONSIBLE INDEX FUND
Principal Investment
Strategies
Comment 4.
Please state whether the underlying index is currently concentrated and, if so, disclose the specific industry or group of industries in which the underlying index is concentrated. Please also add the corresponding risks of investments in such industry or group of industries to the Principal Risks section.
Response 4. As of September 30, 2022, two of the underlying indexes were concentrated in the information technology sector. Accordingly, corresponding disclosures will be added to the Principal Investment Strategies and Principal Risks of the relevant Funds.
Comment 5.
Please provide a range of the number of companies in the applicable Index.
Response 5. The disclosure will be revised accordingly in the Amendment.
Principal Investment Risks
Comment 6.
Please order the risks to prioritize the risks that are most likely to adversely affect the Fund’s net asset value, yield and total return. Please note that after listing the most significant risks to the fund, the remaining risks may be alphabetized. See ADI 2019-08 - Improving Principal Risks Disclosure.
Response 6. We respectfully acknowledge the comment, but we believe that the current presentation of each Fund’s principal risks is responsive to Item 4 of Form N-1A. The present ordering of risks accurately summarizes the principal risks of investing in each Fund, including the risks to which the Fund’s portfolio as a whole is subject and the circumstances reasonably likely to adversely affect the Fund’s net asset value, yield, and total return. We believe that ordering risks with those most likely to adversely affect a Fund’s net asset value, yield and total return first would be prone to subjectivity and could become misleading over time, obscuring the risks to investors. Accordingly, we respectfully decline to implement changes in response to this comment at this time.
Comment 7.
Under Foreign Securities risk, please consider having a separate risk factor for Foreign Currency Transactions.
Response 7. We respectfully acknowledge the comment, however, we believe the current disclosure is adequate. We note that the prospectus includes disclosure regarding “Foreign Currency” and “Foreign Currency Forward Exchange Contracts,” in addition to “Foreign Securities” and “Foreign Investing” risks. Furthermore, we note that the Funds’ SAI also includes disclosure regarding “Foreign Currency Transactions.”
Comment 8.
Under Trading Risk, please disclose the consequence to buyers and sellers of Fund Shares trading at a premium or discount to NAV (i.e., that an investor may pay more for, or receive less than, the underlying value of the Shares). Please also disclose that, where all or a portion
5
of the ETF’s underlying securities trade in a market that is closed when the market in which the ETF’s shares are listed and trading in that market is open, there may be changes between the last quote from its closed foreign market and the value of such security during the ETF’s domestic trading day. In addition, please note that this