Eaton Vance Corp. EV will reportedly roll out its ambitious NextShares funds in Feb 2016. Notably, the Boston-based investment manager has received final nod from the U.S. Securities and Exchange Commission (“SEC”) for an initial launch of 18 NextShares funds.
NextShares is an exchange-traded managed fund (“ETMF”), a hybrid between actively managed mutual fund and exchange-traded fund (“ETF”), which allows active managers to blend their mutual fund strategies into ETFs. These ETMFs will be traded at prices that will be directly linked to the fund’s end-of-the-day net asset value. However, the trading will be done during normal U.S. market hours.
Further, disclosure of holdings will take place on a quarterly basis, unlike daily disclosure requirement for ETFs. This would particularly put to rest stock pickers’ concerns over front running, and help managers generate higher alphas. Further, it would help investors enjoy to a wide range of active strategies that will offer performance and tax advantages similar to ETFs.
Additionally, Eaton Vance is using its own patented technology for funds, which is aimed at providing improved transparency in the pricing of shares. As such, the company will benefit from its ability to license technology to other fund managers, thereby earning fee income. Notably, funds from 11 licensed managers, inlcuding Columbia Threadneedle Investments, Envestnet, Inc. (ENV) and Gabelli Funds, are expected to commence trading soon after the initial launch of the company’s own brand of 18 NextShares funds.
Moreover, since the ETMF structure, just like ETFs, does away with internal trading desks, these funds are less expensive compared with the traditional mutual fund-counterparts. Further, advocates for NextShares funds consider this hybrid product to be more tax efficient. As such, it is likely to draw considerable investor attention.
More importantly, we expect Eaton Vance to enjoy a near-term monopoly in the space, since players like Precidian Investment, BlackRock Inc. BLK and State Street Corp. STT, among others, are still awaiting the initial SEC approval required to offer this hybrid product. As such, the company is likely to reap significant gains from the first-mover advantage.
However, it will take time to educate advisors and investors properly about this innovative product, and this will likely act as a significant near-term headwind for Eaton Vance. Moreover, lower transparency in ETMFs, as compared with mutual funds, is anticipated to keep investors apprehensive.
Eaton Vance currently carries a Zacks Rank #3 (Hold). Federated Investors, Inc. FII is a better-ranked stock in the same industry, holding a Zacks Rank #2 (Buy).
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