Although investors have long held mutual funds as the core holdings in their portfolio, they’ve made a big shift toward exchange-traded funds in recent years as they seek lower expenses. Yet the tradeoff has been that those lower costs come at the expense of active management.
A new structure set to hit the market next year promises to offer the benefits of both mutual funds and ETFs. Analysts and the parent company of the new fund say it may offer investors a way to obtain the active management of a mutual fund while still enjoying the lower costs of an ETF. Although the new funds have yet to start trading, their approval by the Securities and Exchange Commission and inquiries from other companies to license the product hint that this could be a viable investment option in the future.
Exchange-traded managed funds (ETMFs) are a nontransparent actively managed version of an ETF. The new concept is being pioneered under the name NextShares by Boston-based Eaton Vance, which is hoping to have the new funds to market in early 2016.
Jonathan Isaac, director of product management for Eaton Vance and managing director for product strategy for Navigate Fund Solutions, says ETMFs give active managers a way to reduce expenses for investors without having to dramatically change their existing strategy. “What we’re trying to do is level the playing field, in terms of structural costs, between ETFs and mutual funds,” Isaac says.
A white paper by Eaton Vance says the ETMF can offer managers and investors a number of benefits. A look into “avoidable structural costs” found that between 2007 and 2013, the NextShares structure would have reduced the expenses of the average active equity mutual fund by
Because the ETMFs will be traded through an exchange, there are no 12b-1 fees — an annual marketing or distribution fee on a mutual fund — as well as other marketing or transfer agency fees on the products. The funds will have lower administrative costs and lower fund trading costs.
“They immediately have a cost advantage relative to a traditional mutual fund in that you take these sorts of costs out of the equation,” says Ben Johnson, director of global ETF research for Morningstar.
Some analysts and other fund managers say the concept may not go very far. In June, Credit Suisse analyst Craig Siegenthaler cut Eaton Vance’s stock recommendation rating from outperform to neutral over concern about its ability to meet its original late 2015 launch date and to “obtain significant distribution access for NextShares over the next two years.”
And in April, Frank Porcelli, head of BlackRock’s U.S. retail division, told Dow Jones Newswires that NextShares are “like a rubber nail” and “solve no problem.” Eaton Vance’s response was that the SEC’s approval of the structure is proof that it does.