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 The Eaton Vance Stock NextShares is the first so-called actively
managed nontransparent exchange-traded fund. That is a mouthful but
describes a mash-up of a mutual fund - with a manager buying and
selling stocks and bonds in hopes of beating the market - and an ETF
built to shave trading costs and taxes.
Actively managed ETFs must disclose their holdings daily and price
all day long on exchanges. Investors will be able to buy NextShares
throughout the day, but it will only price after the market closes,
like traditional mutual funds.
Managers will have to disclose the funds' holdings only quarterly,
so copycat investors will not be able to track their trades during
market hours.
"It's a whole new infrastructure," said Peter Gau, a spokesman for
Nasdaq Inc, where the new fund trades.
The first NextShares will be managed by Charles Gaffney, who also
manages the Eaton Vance Stock Fund. That fund returned 9.9 percent a
year to investors over the last five years, a period when the S&P
500 index returned 8.7 percent, according to research service Lipper.
In both the traditional and the new fund, Gaffney plans to focus on
shares of companies posting consistent earnings growth.
Should this fund prove successful in attracting investors, others
will follow. Eleven money managers, including Columbia Threadneedle
Investments, Gabelli Funds and Hartford Funds, have licensed the
right to launch NextShares funds. Other fund companies including
BlackRock Inc have also tried to get approval from the U.S.
Securities and Exchange commission to introduce similar products.
But attracting those investors will not be easy in the beginning.
For starters, just one brokerage - FOLIOfn Inc - is selling the new
product at first. NextShares licensor Eaton Vance Corp faces a
triple challenge: It must train investors on how to use and buy the
funds, demonstrate that NextShares perform better than mutual funds
and persuade brokerages to offer the products.
"We would take a cautious, wait-and-see approach to how all this
plays out," said Steve Tu, a Moody's Corp analyst. "Who knows what
the real cost savings could potentially be."
As one of its cost saving measures, Eaton Vance also intends to pay
less to distributors who sell it than mutual funds - another factor
that might dampen the enthusiasm of some firms.
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"We continue to watch the development of these funds, but it is
still a small universe and we do not currently offer them on our
platform," said Morgan Stanley spokeswoman Christine Jockle.
But Eaton Vance CEO Tom Faust said after the funds won regulatory
approval in 2014 that NextShares could eventually replace mutual
funds because their unique structure makes them big money-savers for
investors.
For instance, mutual funds typically redeem shares by selling
securities and cashing out the investor. Selling securities that
have gained value can generate a taxable payout to fund investors.
NextShares, like ETFs, can simply trade underlying securities for
shares of their own funds which generally does not lead to a taxable
payout.
That maneuver also allows funds to operate with lower cash levels
because they don't have to hold cash to meet redemptions.
The funds themselves should deliver better results because investors
buying and selling NextShares will swallow their own trading costs -
those costs usually are shared by all investors in a typical mutual
fund.
Eliminating all of those costs and fees could help active investors
beat the market, Eaton Vance has said.
(Reporting by Trevor Hunnicutt; Editing by Cynthia Osterman)
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