A Close Look At Eaton Vance's ETMFs

May 07, 2015


No Cash On The Books
So, too, does the fact that ETMFs won't have to keep cash on the books to accommodate investor redemptions on an ongoing real-time basis the way mutual funds do. That will enhance returns to the extent that keeping that cash on hand constitutes a drag on returns, at least in a rising market.

"In theory, it has better tax-efficiency; in theory, it can be more fully invested because it doesn't have to keep cash available to deal with redemptions," said Todd Rosenbluth, an analyst at S&P Capital IQ. "You can get a cleaner way of getting management's investment style."

The other big cost-related aspect that's quite like ETFs is the absence of 12b-1 marketing fees in the ETMF structure that used to be a staple of mutual fund. Fewer fees mean better returns for investors.

The absence of 12b-1 fees, interestingly, looms also as one of the challenges to get investors to adopt the ETMF structure. These fees have historically helped get the word out about mutual funds. Without them, it's fair to wonder how ETMFs will be aggressively marketed.

As far as that goes, Convergex's Colas remembers a meeting in New York on the ETMF a few years back hosted by Eaton Vance that ended with a litany of questions about 12b-1 fees.

"People kept asking: 'What about the 12-b1 fees?,'" Colas remembers, arguing that the mutual fund industry has come to rely on such methods of compensation, and may have a hard time integrating a mutual-fund-type structure that doesn't use them.

12-b1 Fees Have Already Faded
Officials at Eaton Vance counter that 12-b1 fees, while still a part of the modern fund industry, aren't nearly as widespread as they once were. Stephen Clarke, the executive in charge of the ETMF initiative, says only about a third of existing mutual funds even use 12-b1 fees these days.

The ETMF marketing plan for Eaton Vance and a growing number of firms it has licensed the structure is to flood the zone with their respective NextShares products at around the same time, helping to create a buzz. The three firms alluded to above that so far have embraced ETMFs are American Beacon; Gabelli; and the insurance company Hartford. Clarke says a fourth is in the wings.

The point is this: When NextShares do arrive, they'll be coming from a number of corners of the fund industry and, to hear Clarke, pretty much at the same time. If that's true, it might be hard not to take note of a new kid in town named NextShares and, perchance, to kick the tires as well.

A Race Against Time 
A deeper issue that NextShares face is the increasing skepticism among investors regarding the value of active management.

It's been 40 years since Vanguard introduced the first retail index mutual fund and, by now about 40% of all institutions favor some form of passive investing, whether that's indexing or something like the passive strategies served up by the likes of Dimensional Fund Advisors.

The gospel of the Standard & Poor's Indices versus Active (SPIVA) data series has more and more adherents over time, chipping away at the market share of mutual fund companies. The twice-yearly SPIVA report paints a consistent picture; namely, that in any given year, only about a third of active managers outperform their relevant indexes and, worse yet, that over time, the percentage of outperformance drops.

"This is going to allow mutual funds to play defense better than they have before," S&P Capital IQ's Rosenbluth said. "All of them are under pressure from money moving toward ETFs, toward the lower-cost alternative. This will allow them to keep some of that money in-house that might have been looking to leave."



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