How the new NextShares will trade

In the coming months, several well-known asset management firms will launch Nasdaq-traded funds that use a new investment structure known as NextShares. These exchange-traded managed funds will allow active portfolio managers to continue managing assets the way they do in conventional mutual funds, while providing investors the tax advantages and structural efficiencies of ETFs.

One of the key features of the SEC-approved NextShares structure is that portfolio holdings will be disclosed quarterly like mutual funds, and not daily, as ETFs are required to do. This allows active managers to pursue their alpha generating strategies without having to worry about those strategies being revealed to other market participants, who could use that information to trade for their own profit.

The NextShares structure addresses the problem that has impeded the growth of actively managed exchange-traded funds, namely the requirement that active managers disclose their holdings daily. If NextShares retains the disclosure requirements of a mutual fund, yet is listed on an exchange like an ETF, advisors and investors alike may wonder how, exactly, NextShares will trade.

That’s a good question, because as NextShares CEO Stephen Clarke explains, the securities will trade in an entirely new way.

“We use a new trading methodology known as NAV-based trading,” Clarke said. “During the trading day, the fund’s shares will trade on Nasdaq at a market-determined premium or discount to the net-asset value of the fund, which will be determined at the end of that day. The premium or discount represents the investor’s cost of coming into or going out of the fund.”

To help investors, Nasdaq will provide indications of NextShares portfolio values every 15 minutes throughout the trading day. At the end of the day, the fund’s custodian will calculate the fund’s net-asset value and then send that value to the Depository Trust and Clearing Corporation, where it will be matched to each NextShares trade. Those trades will then go on to be settled with the day’s other market transactions.

NAV-based trading will allow investors to know exactly what they pay in trading costs, Clarke said, and will offer them the ability to control their own trading costs through limit orders. Investors will likely experience low trading costs because of the simple, reliable market-making profit opportunity that NextShares facilitates.

While being available for trading throughout the day, NextShares are not intended as a vehicle for short term trading.

“In a sense, NextShares are the polar opposite of index-based, passive exchange-traded funds,” Clarke said. “ While they incorporate the operational efficiencies of ETFs, NextShares allow active managers to do what they do best, which is striving to provide market alpha, something a passive fund simply can’t do. But capturing that alpha often requires patience and a time horizon that is longer than a few days. For that reason, NextShares are more suited to longer-term investors who will hold their positions for a time, and for whom intra-day trading is not especially important.”

Many prominent active asset managers, including Columbia Management, Gabelli Funds, Ivy Funds, Pioneer Investments, Principal Financial and Eaton Vance, the parent of NextShares, are planning to launch NextShares versions of several of their successful mutual funds. Through NextShares, investors will be able to benefit from having access to these leading active management strategies in a structure that provides the cost savings and tax efficiencies of exchange-traded funds.