Eaton Vance’s ETMF Finally Debuts

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February 25, 2016
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Exchange-traded managed funds—the new structure patented by Eaton Vance that falls somewhere between an ETF and an open-ended mutual fund—are now availabe.

The first ETMF, the Eaton Vance Stock NextShares (Symbol: EVSTC), launched Friday, Feb. 26.

Listed on the Nasdaq, EVSTC is built around a patented trading methodology designed so that the structure can effectively be a nontransparent actively managed ETF. These new actively managed funds would trade on an exchange at prices directly linked to the fund’s next-determined daily net asset value, (NAV) using what is referred to as “NAV-based trading.”

In NAV-based trading, prices would vary from NAV by a market-determined premium or discount, which could at times be zero, Eaton Vance said.

More To Come

EVSTC is the first in a lineup of at least a dozen ETMFs the firm has in registration, and will invest in global equities of any market capitalization, according to the prospectus.

The promise of NextShares is to be cheaper and more efficient than mutual funds, though not cheaper than most ETFs. EVSTC has an expense ratio of 0.65%, higher than the average ETF expense ratio.

EVSTC, which will be launching exclusively on brokerage firm Folio, is a brand-new structure. It’s not an ETF. It’s not a mutual fund. There’s none like it, and as such, it’s up to the investor to learn the new technology.

“The demand this places on investors—learning an entire new kind of trading—strikes me as significant,” said Dave Nadig, director of ETFs for FactSet.

“The reason the first ETMFs are only launching with a single broker—and a nontraditional one at that—is because nobody today has ever placed an order that says, ‘I want this mutual fund at 10 cents over NAV at the end of the day,’ and the major brokers are either taking their time getting ready to handle that order type, or waiting to see if the early adopters generate any significant assets and flows,” he said.

ETMFs and ETFs are similar in many ways. Here are some key points for comparison:

  • The ETMF structure, like ETFs, dispenses with internal trading desks that mutual funds rely on. Like ETFs, ETMFs instead make use of authorized participants (APs). The involvement of APs explains why ETMFs will have annual expense ratios that are about 40% cheaper than the typical mutual fund.
  • ETMFs are also quite like existing open-ended mutual funds in that they are nontransparent. Portfolio disclosure is only required every quarter, with a 60-day lag on top of that. This preserves the "secret sauce" that active managers consider key to their capacity to generate alpha.
  • ETMFs can be bought and sold in real time during the trading day just like ETFs, but they won't actually price until after the close at NAV. This is called an "NAV-based trade" and is the original intellectual property behind the ETMF that Eaton Vance bought from ETF industry entrepreneur Gary Gastineau. With an NAV-based trade, the final price an investor pays is NAV plus or minus a premium or discount determined at the time of trade.

To whom will ETMFs appeal is unclear. Whether ETF investors want nontransparent active or not is hard to say because, as Nadig says, “It doesn’t exist in an ETF form.”

“Overwhelmingly, the larger market has been voting against nontransparent active in traditional mutual fund formats, and in favor of transparent-passive ETFs,” he said. “Perhaps the benefits of the ETMF structure over traditional funds—slightly lower costs, the potential for more tax efficiency through creation/redemption—will drive investors in droves.”

Only time will tell. There are several money managers who have signed on to the offer NextShares, according to Eaton Vance, including ALPS Advisors and Gabelli Funds.

For now, investors considering jumping into this new structure should do their homework.

“They’re an entirely new thing, with complexities you have to understand before you enter that first order,” Nadig said.


Contact Cinthia Murphy at cmurphy@etf.com.

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