A new kind of investment fund starts trading on Wall Street on Friday among hope from backers that it could become big enough to supplant traditional mutual funds.
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.
“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.