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Portfolio > Mutual Funds

As Eaton Vance Rolls Out NextShares, Value of Active Management Questioned

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Eaton Vance and Nasdaq said Monday that the first NextShares (EVSTC) will begin trading late next month. The new fund structure — dubbed “a hybrid product” — aims to combine features of an actively managed mutual fund with the structure of an ETF.

“Our initial NextShares will offer investors access to established fund strategies in a new structure with significant potential investor benefits,” said Eaton Vance CEO & Chairman Thomas E. Faust Jr., in a statement. “The fund’s introduction provides the first opportunity to demonstrate the performance, tax efficiency and trading characteristics of NextShares.”

According to the company, NextShares “offer the potential for benchmark-beating returns based on the manager’s proprietary investment research.”

But even with lower costs for NextShares compared with traditional Eaton Vance actively managed mutual funds, is the cost of such “non-passive” products worth the price?

In the minds of some speakers at the Inside ETFs 2016 conference taking place this week in Hollywood, Florida, the answer, generally speaking, is no.

“Active managers persistently fail after expenses,” said Larry Swedroe, director of research for wealth manager Buckingham, who spoke to some 2,000 conference attendees on Sunday.

“When they add value before expenses, they are exploiting dumb retail money,” Swedroe added.

Several economists and financial analysts at the conference spoke about returns reverting to the mean. Furthermore, they stressed that the era of annual returns averaging 7% or 8% is over, due to low interest rates and other factors.

Swedroe, for instance, pointed to a survey of economists that predicted 4% to 5% annual real returns in the U.S. at least for the long term. In addition, these returns need to be adjusted for inflation, which is assumed to be 2%, resulting in a total nominal return of 6% to 7%.

(He notes that expected returns of international stocks are predicted to be higher than returns of domestic stocks, thanks to their lower valuations.)

When it comes to performance, “80% of large-cap funds have lost to their index,” said Dave Nadig, director of ETFs for FactSet, in a talk on Sunday.

“More advisors are recommending ETFs, 81%, over mutual funds, 78%,” Nadig said. Mutual funds, generally speaking, are like “a dead man walking,” he added.

For some industry leaders, the comparisons now need to be between active, passive and smart-beta funds.

Vanguard, for instance, views smart-beta funds “not as indexing” per se but more “as active management, though the bets are done in highly automated … ways,” CEO Bill McNabb said Monday at the conference.

McNabb’s colleague, Joel Dickson, says smart-beta is “akin to active management … [operating] through a form of indexation.”

“This is a good thing,” Vanguard’s global head of investment research and development said Monday at a later session. “We see lower costs and more transparency.”

Given the ongoing debate over smart beta and the focus on whether or not actively managed returns are worth the cost, advisors and industry participants will be closely watching how investors embrace yet another class of investment products.

— Check out Vanguard CEO Urges Industry to Slow Down on ETF Rollouts on ThinkAdvisor.


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