NextShares & The Death Of Mutual Funds

August 04, 2015

There are a lot of people out there who are skeptical about Eaton Vance's NextShares, including me.

The reason is simple: NextShares, which are exchange-traded-managed funds (ETMFs), are complex.

They look like exchange-traded funds … but they're not exchange-traded funds. They work like active mutual funds … but they're not active mutual funds. They trade like stocks … but they don't really trade like stocks. Before the products can come to market, brokers have to create an entirely new order type to even allow people to buy and sell them.

Why Bother?
Why would investors go through the hassle of learning a new order type just to buy some run-of-the-mill active funds?

(For a detailed look at NextShares, see this ETF Report article.)

That's the prevailing wisdom, and it may well be right. It certainly has seeped into the news coverage of NextShares, which is decidedly nonplussed.

Consider our recent article on the newly released pricing structure for NextShares: "The fees are more expensive in some areas and cheaper to comparable ETFs. For example, the Eaton Vance Bond NextShares will charge 0.60 percent, but similarly broad-reaching bond ETFs that are actively managed but transparent—the WisdomTree Western Asset Unconstrained Bond ETF (UBND), SPDR DoubleLine Total Return Tactical ETF (TOTL) and PIMCO Total Return ETF (BOND | B)—all come with an expense ratio of 0.55 percent."

Radical Pricing
That's good analysis. How many people will buy the "complex" Eaton Vance Bond NextShares when they could buy Jeffrey Gundlach's or Mihir Worah's ETFs instead? (Both Worah and Gundlach are speaking at our forthcoming Fixed Income conference.)

But maybe we're approaching this all wrong. After all, viewed from an exclusively mutual-fund window—and specifically, viewed from the window of Eaton Vance itself—the new pricing is radical.

Remember, NextShares are designed essentially as share classes of existing mutual funds. And if you compare the fees for NextShares with mutual-fund share classes from Eaton Vance, the results are impressive:

Fund NextShares A shares C Shares I Shares
Balanced Fund 0.75% 1.14% 1.88% 0.89%
Bond Fund 0.60% 0.94% 1.69% 0.69%
Floating Rate & High Income Fund 0.75% 1.10% 1.85% 0.85%
Global Dividend Income Fund 0.90% 1.24% 1.99% 0.99%
Global Macro Absolute Return Fund 0.70% 1.05% 1.75% 0.75%
Government Obligations 0.80% 1.17% 1.92% 0.92%
Growth Fund 0.70% 1.05% 1.80% 0.80%
High Income Opportunities 0.60% 0.89% 1.64% 0.64%
Large Cap Value 0.70% 1.01% 1.76% 0.76%
Richard Bernstein All Asset Strategy 1.07% 1.40% 2.15% 1.16%
Richard Bernstein Equity Strategy 0.95% 1.26% 2.01% 1.01%
Small-Cap 0.95% 1.39% 2.14% 1.13%
Stock 0.70% 1.05% 1.80% 0.80%
Parametric Emerging Markets 1.05% 1.36% 2.11% 1.11%
Parametric International Equity 0.60% 0.90% N/A 0.65%

10 Percent Cheaper
On average, the fees are 10 percent cheaper than the Institutional share class, 31 percent cheaper than the A Share Class, and 58 percent cheaper than the C share class.

And that's all before you consider the fact that you need $1 million to qualify for the Institutional Shares, while the A Shares charge a 5.75 percent load.

Eaton Vance is a big company, with $130 billion in mutual-fund assets. With this kind of pricing, a meaningful portion could shift into NextShares, and certainly new inflows could bias that way. Even if the trading process doesn't work perfectly, and you sacrifice 0.10 percent to 0.40 percent getting in and out, the cost savings will be worth it.

I don't know if NextShares will succeed. There are still massive head winds.

Getting investors to understand and adopt a new trading technique is extremely hard, and most investors run from things they don't understand. But Eaton Vance is throwing real effort at this and is clearly willing to engage in a little creative destruction to get them off the ground.

At the very least, it makes this all a lot more interesting.

At the time of this writing, the author held no positions in the securities mentioned. Contact Matt Hougan at [email protected].

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