Nearly 15 months after the SEC granted Eaton Vance the exemptive relief to launch NextShares, the firm that made its name in mutual funds has finally seen the market debut of its first NextShares product. When Eaton Vance first made a push to innovate the investment product “wrapper” lineup by squeezing in between the conventional ETF style and the traditional mutual fund approach, it was met with mixed reactions. Some hailed it as novel while others questioned the timing of doing so when the masses seemed to be trending to passively-managed rules-based or index products.
The launch team’s decision to debut the product on a Friday underscores the internal recognition of the potential challenges. How will market makers handle the related trading? Will there be any glitches in pricing? Who will even allow investors to trade on their platform? To answer that last question, it appears Folio Institutional is the only player for now as the rest of their peer group takes a wait-and-see approach.
Even the bulk of the marketing fanfare was put off to Monday, in the event Eaton Vance needs the weekend to work out any kinks. The money manager is set to ring the NASDAQ Opening Bell on Monday to commemorate the launch.
For those on the marketing and distribution end of the fund management business, the potential for success boils down to three basic areas:
1) Investor Awareness:
The average financial adviser and the typical mass affluent investor began embracing ETFs and driving money into the asset class just five years ago. Today, domestic allocations to ETFs is approximately $2 trillion. Truth be told, there are hundreds of successful financial advisers who are yet to meaningfully commit client assets to ETFs – even though the product wrapper represents the hottest sleeve of managed money products today and has dozens of offerings available for less than 25 basis points. Are those advisers prepared to examine a new alternative and make the differentiation?
2) Investor education:
Can Eaton Vance, and others that license their model, communicate the value proposition well enough to convince financial advisers to direct their client money into their strategies? The communication team did a good job by addressing 59 questions people might ask here.
3) Investor implementation:
Should wholesalers, marketers and PR people like me be successful enough to raise awareness and deliver the education required, will investors see enough value to slot some of these funds into their overall asset allocation?
As someone that has helped promote mutual funds, ETFs, institutional asset managers and other investment products over the past 15 years, I do wonder if the NextShares concept comes to market at a bad time. Low-cost ETFs, particularly those that carry expense ratios less than 50 basis points, absolutely dominate the asset gathering game. Low cost and tax efficiency is what drove many investors away from mutual funds in the first place. How can those selling NextShares turn the tide and find a place in between the demand for low cost investments and the desire to deliver alpha-seeking actively managed strategies to market?
Despite the projected challenges, there is a real case for a product designed to assign trading costs only to the investors that do the trading – as opposed to being allotted across the shareholder base – and offers a means for active managers to bring products to market without having to expose their proprietary thinking to the traditional transparency rules associated with conventional ETFs.
I’ve heard some pundits say that NextShares will struggle to attract $200 million of outside money to its inaugural product in the first year. Others have said the structure will have close to $5 billion by the end of 2016. Where do you fall? Do you think they are too late or will Eaton Vance and its partners reap big rewards from this innovation? Send me your take here.