Fund investors are flocking to index-tracking ETFs as they try to improve performance.
Mutual funds are on trial. They stand accused of being freighted with unnecessary costs, from the fees paid to broker-dealers to the cost of holding cash and redeeming securities to meet withdrawals. Fund investors are flocking to index-tracking exchange-traded funds in an effort to improve performance.
Against that backdrop arrives NextShares, a product that could be the Model T of investment management — delivering the promise of better performance at lower cost than mutual funds. Or it could be an Edsel.
The white-hot ETF industry has struggled to embrace active management. Assets in U.S. ETFs have grown ninefold in the last decade to nearly $2 trillion. But actively managed funds remain a tiny sliver of the market, representing 1% of the assets in ETFs.
Until 2008, the Securities and Exchange Commission didn't allow actively managed exchange-traded funds at all. Since then the funds have faced a number of restrictions, including a requirement to disclose their underlying holdings.
MAINTAIN VALUE
That's a no-go for many fund managers, who believe the best way to maintain the value of their strategies is to avoid telegraphing them to the market.
“There's nothing more important to a good mutual fund manager — who really understands what he's doing — than nobody knowing what he's done until he's done doing it,” said Gary L. Gastineau, a longtime ETF industry consultant and a primary inventor of the technology underpinning NextShares.
On Dec. 2, NextShares backer Eaton Vance Corp. became the first and only firm to gain SEC approval to not disclose the holdings of an actively managed ETF.
The hard-won approval was an important milestone, but by no means the only one.
Eaton Vance plans to license NextShares to other companies. The funds will need to win over advisers and live up to the promise of reducing costs to entice other asset managers, according to Lawrence Petrone, director of research at kasina, an asset management consultancy.
Eaton Vance says it plans to market NextShares to investors as early as the second quarter of 2015, using the funds' novel approach to trade execution, purchasing funds for their end-of-day market value plus transaction costs.
