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Portfolio > Mutual Funds

Neither ETF Nor Mutual Fund, Behold the Exchange-Traded Managed Fund

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With a few rare exceptions, the mutual fund industry has not participated or benefited from the trillion-dollar rise in ETF investing. But that could soon change. A new type of exchange-traded product that’s been dubbed the “ETMF,” or exchange-traded managed fund, has been introduced.

The Eaton Vance Stock NextShares (EVSTC) was launched on the NASDAQ February 26 and invests primarily in growth stocks selected by portfolio manager Charles Gaffney. Its underlying portfolio is also available as an Eaton Vance mutual fund with Class A, C, and I shares (EAERX, ECERX and EIERX).

Fund companies like Eaton Vance are hoping this new breed of exchange-traded vehicle will gain popularity with financial advisors and investors. It’s a hybrid investment, combining certain characteristics of a mutual fund and of an ETF but not exactly like either.

For example, unlike a traditional active or index ETF, the NextShares fund does not reveal its daily holdings in order to preserve confidentiality of the manager’s trades; it discloses them quarterly, like mutual funds do.

And like an ETF — and unlike a mutual fund — the NextShares fund is tax-efficient. It doesn’t have to sell assets for cash when an investor sells shares, which could incur capital gains that have to be distributed to all fund investors. When a NextShares investor sells shares, he simply sells them to another investor, like a stock transaction, and the fund incurs no capital gains.

Trading prices for NextShares are available intraday through Folio Investing and Folio Institutional using the fund’s NAV to determine the price. For example, a price marked as “NAV +$0.01″ means that day’s closing NAV plus one cent. According to NextShares Website, “Representing prices in this manner makes it clear that bids, offers and execution prices for NextShares are based on NAV, and that the final price of executed trades is determined when NAV is computed.”

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

How high are the expectations for the ETMF format?

They’re so high a broad group of investment advisors like ALPS, Columbia Threadneedle Investments, Hartford Funds, Gabelli Funds, Pioneer Investments and Principal Management have struck pending deals to offer their own ETMFs off-shoots using the NextShares product prototype. The success of Eaton Vance’s NextShares ETMFs to gather assets will likely determine whether these firms follow through with plans to offer their own ETMFs.  

Although the ETF landscape is littered with different product structures, the oldest and best known ETFs – the SPDRs (SPY), Diamonds (DIA) and Nasdaq-100 (QQQ) — are organized as UITs (unit investment trusts). This type of legal structure does not reinvest dividends into the fund, but instead holds dividends until they’re paid to shareholders quarterly or annually. These mechanics cause a situation known as “dividend drag.”

By law, UITs must fully replicate the indexes they track and cannot receive income from loaned securities. Unlike open-end funds, UITs have expiration dates, which can range from a period of years to decades. Most expiration dates are continuously rolled or extended.

Eaton Vance has registered 18 initial NextShares funds, covering a broad range of active strategies in fixed income, absolute return, and multi-asset classes. The next group of NextShares is expected to launch toward the end of March and will focus on municipal bonds and global equity income.

As of Jan. 31, Eaton Vance (EV) and its affiliates managed $302.6 billion in assets.

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