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Are Eaton Vance's NextShares' (ETMFs) the Future of Funds?

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Eaton Vance's NextShares, also called, Exchange-Traded Managed Funds, or ETMFs, is a very new financial instrument compared to mutual funds or even ETFs. As this new breed of funds hopes to surge in popularity, it is obvious they will have to overcome many hurdles. Eaton Vance Corp know this pretty well as it has been facing headwinds to launch its new breed of actively managed fund this year.

However, as convincing brokers or dealers to upgrade their platforms for incorporating this new type of investment instrument looks to be a major headwind, an announcement from Envestnet has come as a great relief. The Chicago-based online-investment tools provider has plans to offer NextShares to financial advisors via its wealth management platform. The offering, Envestnet said, will be part of its “advisor-as-portfolio-manager” tools and will also be available through its Fund Strategist Portfolios. Online brokerage services Folio Investing and Folio Institutional will also offer the new fund.

Brief History of Actively Managed ETFs

Actively Managed ETFs made their debut in the US in 2008. This came after one and half decade after the launch of the first index-based ETF in Jan 1993. The first actively managed ETF, Bear Stearns Current Yield Fund, survived only a few months. Nonetheless, it paved the way for a new genre of investing.

These active funds have attributes of both ETFs and mutual funds. They will be trading through the day, but it is not required to disclose holdings on a daily basis. This is of great relief for fund managers, who in the case of ETFs need to disclose holdings daily.

Since the launch, these funds had net assets of $19.46 billion as of Jul 31, 2015. This is number is very miniscule, compared to the $11.51 trillion held by actively managed mutual funds.

Eaton Vance’s NextShares

Eaton Vance got clearance from regulators last year to introduce the new exchange-traded managed funds. Eaton Vance has filed for 18 funds, named NextShares. Meanwhile, another 13 firms have signed preliminary licensing deals with Eaton Vance unit and NextShares sponsor Navigate Fund Solutions.

Nasdaq has announced that the NextShares, ETMFs, will be listed on the Nasdaq Stock Market. Nasdaq notes: “NextShares are a hybrid of exchange-traded funds (ETFs) and an actively managed mutual fund. They feature lower costs and more tax benefits than actively managed funds, but holdings only need to be disclosed monthly or quarterly.” NextShares will be traded during normal US market hours, using a NAV-based model.

Morningstar’s director of global ETF research, Ben Johnson, opines that Eaton Vance has a tough task at hand to offer seamless experience to investors. It will be challenging to come up with a solution for buyers and sellers of the funds that have a unique trading mechanism.

Envestnet’s Platform

It was a relief when Envestnet announced plans to make NextShares available on its platform. Jim Patrick, Executive Vice President of Envestnet, said: “Further expanding our FSP platform to include NextShares funds is a great demonstration of what we consider to be our central mission—helping financial advisors deliver high-quality, personalized, and holistic wealth management services in the most cost- and tax-efficient way possible.”

Should Investors Jump In

It will take some time before investors can invest in NextShares. However for mutual fund investors keen on investing in new funds, we have cherry picked some favorably-ranked funds.

Interestingly, a study released by the National Bureau of Economic Research last year had shown that new mutual funds are likely to outperform older funds. The study believes the ‘Fund Age’ has a role to play in the returns or the fund performance. This is driven by factors that new fund managers take less risk, they are more skilled, and the Industry growth creates a stiff competitive pressure for older funds.

The newer funds outperform the older counterparts based on ‘gross benchmark-adjusted returns’. The study considers funds equal to or below 3 years to be young. Funds aged more than 10 years are considered to be old. The study noted that these new funds outperform oldest by 7.2 basis points.

For now, investors may buy the following 3 mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Thornburg International Value R6 (TGIRX - Free Report) seeks capital growth over the long term with income being the secondary objective. TGIRX invests in non-US securities of depository receipts of these securities. Investments in developing countries may be lower than assets invested in developed countries.

TGIRX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). TGIRX has gained 7.5% year to date. TGIRX was incepted on May 1, 2012 and has returned 9.5% since then. The annual expense ratio of 0.73% is lower than the category average of 1.34%.

JHancock Large Cap Equity R2 (JLCYX - Free Report) invests a large chunk of its assets in large-cap firms’ equity securities. A maximum of 20% may be invested in bonds of any maturity and a maximum of 15% in junk bonds that are rated as low as CC by Standard & Poor's Ratings Services (S&P) or Ca by Moody's. A maximum of 35% may be invested in non-US securities.

JLCYX currently carries a Zacks Mutual Fund Rank #2 (Buy). JLCYX was incepted on Mar 1, 2012 and has returned 54.4% since then. The annual expense ratio of 1.18% is however higher than the category average of 1.34%.

Deutsche Small Cap Growth R (SSDGX - Free Report) seeks capital appreciation over the long term. SSDGX invests a chunk of its assets in stocks and securities having equity characteristics that of US small-cap firms. A maximum of 20% of assets may be invested in non-US and large-cap firms.

SSDGX currently carries a Zacks Mutual Fund Rank #2 (Buy). SSDGX was incepted on May 1, 2012 and has returned 29.5% since then. The annual expense ratio of 1.63% is however higher than the category average of 1.33%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank.



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