The Big Boys Come A-Knockin’

August 22, 2008

We've got the attention of the big boys now.

News that Eaton Vance is considering launching ETFs is absolute proof (if you still needed it) that ETFs are here to stay. They aren't a fad, or a gimmick or just trading tools. They are a serious competitor to traditional mutual funds, and they are changing the way investors invest—for the better.

Depending on how you count, ETFs currently have between 4% and 6% of all mutual fund assets in America. Reporters love to ask me if ETFs will ever pass mutual funds in the asset count. I don't know about that. But I do know that the share of mutual fund assets invested in ETFs is going to grow, and that we're not staying in the single digits for long. It looks like Eaton Vance and PIMCO know this too, and they're jumping on the ETF bandwagon before it's too late.

Eaton Vance's possible entry is especially instructive because, as Murray noted in his story on it, they are one of the biggest players in the closed-end fund (CEF) industry. CEFs are a sweet deal for fund companies: Commission-based brokers sell shares in the fund before it ever launches. Then, once the product is launched, those assets are locked into that fund strategy ... forever. Shareholders in a CEF who want to get out of the fund can sell their shares to other investors (just like ETFs, CEFs trade like stocks on an exchange). But unlike ETFs, no one can redeem those shares back to the fund company.

The money is literally captive. For the fund company, it's like printing money.

Eaton Vance, to be sure, prints a ton of money with CEFs. Last year, they raised $5.5 billion for a single fund tracking a covered call investment strategy. It charges 1.2% in expenses per year. You do the math.

To my mind, the fact that a giant CEF company like Eaton Vance would turn its attention to ETFs, which can't be sold on commission and can be redeemed by shareholders, tells you that it thinks ETFs are a big deal.

My hope is that they've gotten a lot of fee-only advisors asking them, "Why don't you have ETFs?", or that ETFs have created a level of pushback against CEFs.

I think the value and flexibility that ETFs offer is starting to sink in with advisors, and they're starting to demand that companies like Eaton Vance and PIMCO get with the program.

Ultimately, that's a good thing for everybody.


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