6. What terms and phrases are useful to know for understanding NextShares?
Active (or actively managed). The management of an investment fund or account that seeks to exceed the returns of its performance benchmark. Contrasts with passive management, or indexing, which seeks to match the returns of a designated benchmark index.
Arbitrage. Offsetting purchases and sales of closely related financial instruments, seeking to profit from short-term price discrepancies.
Authorized Participant. A broker-dealer or institutional investor that has entered into an agreement with a NextShares fund or ETF permitting the purchase and redemption of Creation Units of shares in transactions with the fund through its distributor. Authorized Participants may purchase and redeem Creation Units both for their own accounts and for customers.
Balancing Amount. In a Creation Unit transaction by a NextShares fund or ETF, the difference between the NAV of a Creation Unit and the aggregate value of the Basket instruments exchanged. To ensure that Creation Unit transactions take place at NAV, the party conveying the lower value pays the Balancing Amount to the other party in cash.
Basis point. One basis point equals 0.01%.
Basket. The securities, cash and/or other instruments designated by a NextShares fund or an ETF to be paid and received in connection with Creation Unit transactions. For NextShares, the same daily Basket is used for both purchases and redemptions and the securities and other non-cash instruments included in the Basket must be current holdings of the fund.
Business day. A day that the New York Stock Exchange is open for trading, generally Monday through Friday each week except designated market holidays.
Cash drag. The impact of holding cash on the performance of an investment fund. Cash drag hurts fund performance when the returns of the fund's non-cash investments exceed cash returns, and helps fund performance when the opposite is true. Cash drag is not reflected in the stated total expense ratio of funds.
Closed-end fund. An investment company that maintains a substantially fixed number of outstanding shares. For closed-end funds, purchases and sales of fund shares after the fund’s initial public offering are typically limited to secondary market transactions, meaning that the fund itself is not a party to the transactions. With limited exceptions, closed-end funds are not able to issue or redeem shares in response to changing investor demand, which can cause a closed-end fund to trade at significant premiums or discounts when there is an imbalance of supply and demand for the fund’s shares.
Creation. The issuance of fund shares in Creation Unit quantities by a NextShares fund or ETF. Creations are limited to transactions by or through Authorized Participants.
Creation Unit. A block of fund shares of designated size used by a NextShares fund or ETF to issue and redeem its shares. Creation Unit sizes for NextShares may vary from 5,000 to 50,000 shares. Creation Unit transactions may only be executed by or through Authorized Participants.
Depository Trust Company (DTC). A subsidiary of Depository Trust & Clearing Corporation involved in processing securities trades and maintaining positions in traded securities on behalf of beneficial owners.
Discount. Price below NAV or other measure of value.
Distribution and service (12b-1) fees. Payments by a mutual fund to support fund distribution and shareholder service made in accordance with Rule 12b-1 under the Investment Company Act. 12b-1 fees are paid to the fund's distributor and generally passed through to broker-dealers and other intermediaries representing shareholders. Permitted 12b-1 fees are limited to 100 basis points of average fund net assets annually. Mutual funds may impose different amounts of 12b-1 fees across their share classes or impose no such fees. NextShares funds do not pay 12b-1 fees.
Dollar-based order. An order to buy or sell a specified dollar amount of a security or other instrument. Contrasts to share-based orders, in which the number of shares to be bought or sold is specified.
ETMF. A registered trademark of Eaton Vance not authorized for use in connection with exchange-traded products. Exchange-traded managed funds were previously sometimes referred to as ETMFs, but that reference is no longer permitted.
Eaton Vance Corp. (Eaton Vance). The parent company of NextShares Solutions LLC, the developer of NextShares, and Eaton Vance Management, investment adviser to the first NextShares funds.
Exchange. A regulated market for exchanging interests in securities and other financial instruments. By number of listed securities, the largest U.S. securities exchanges are the New York Stock Exchange and Nasdaq.
Exchange-traded fund (ETF). An open-end fund or UIT registered under the Investment Company Act whose shares trade on an exchange at prices determined in the market at the time of trade execution. Most ETFs are passively managed.
Exchange-traded managed fund. The generic name of NextShares. A registered investment company regulated under the Investment Company Act whose shares trade on an exchange at NAV-based prices. Like ETFs, exchange-traded managed funds may issue and redeem shares in Creation Unit quantities on a daily basis.
Exchange-traded product (ETP). An umbrella term encompassing ETFs, NextShares and other exchange-traded financial instruments that can issue and redeem shares on an ongoing basis.
Exemptive relief. For an investment fund, an exemption from specified provisions of the Investment Company Act or other relevant federal securities laws granted by the SEC. NextShares and ETFs both have exemptive relief permitting exchange trading, limiting redemptions to Creation Unit aggregations of shares and authorizing other distinctive practices.
Feeder fund. An investment fund that pursues its investment program by investing in an affiliated fund (master fund), rather than by holding its investments directly.
Flow-related trading. Purchases and sales of investments by an investment fund to put invested shareholder cash to work and to raise cash to meet shareholder redemptions.
Free-riding. In investment management, uncompensated use of another investment organization's research or portfolio information.
Front-running. A short-term trading strategy seeking to profit from buying and selling ahead of other large investors whose trades the front-runner learns to anticipate.
Fund trading costs. The costs paid by an investment fund to purchase and sell securities and other investments. Fund trading costs include commissions paid and the estimated bid-ask spread and market impact costs of the fund's trades. Stated total expense ratios of funds do not include trading costs.
In kind. Paid or received in securities or other non-cash instruments. NextShares and ETFs commonly issue and redeem their shares primarily on an in-kind basis, but may transact wholly or partly in cash when in-kind delivery is not practicable or deemed not in the best interests of shareholders.
Index. An aggregation of securities or other financial instruments. Index performance reflects the price appreciation or total return of the constituent instruments based on the index's prescribed weighting methodology. It is not possible to invest directly in an index.
Indexing. Passive investment management designed to match the performance of a designated benchmark index.
Intraday indicative value (IIV). A real-time estimate of the intraday value per share of a NextShares fund or ETF calculated and disseminated throughout regular market trading hours.
Investment company. A pooled investment fund. Shares of an investment company represent indirect ownership interests in the fund's underlying net assets.
Investment Company Act of 1940, as amended (Investment Company Act). The principal law governing the structure and operation of investment companies in the United States.
Investor trading costs. The costs paid by investors to enter and exit positions in an investment fund. Investor trading costs include the commissions, sales charges and other transaction fees paid by the investor and the difference between the investor's executed trade price and the corresponding fund value (the amount of premium/discount) at the time the trade is priced.
Limit order. An order placed with a broker to buy or sell a designated security or other instrument at a specified price or better. Price limits for NextShares limit orders are expressed relative to NAV, rather than as an absolute dollar price. Buyers and sellers of NextShares can use limit orders to control their trading costs, but not the dollar value of purchases and sales.
Management fees. Fees paid by an investment fund for the portfolio management and administration services provided by its investment adviser and administrator. Reflecting the differing nature of their portfolio management, index funds typically have lower management fees than actively managed funds.
Market maker. A trader that actively quotes bids and offers and enters into short-term positions in securities and other instruments trading in the secondary market. ETP market makers typically seek to realize short-term profits both by trading in the secondary market and by transacting with the issuers of the traded instruments (primary market transactions).
Master-feeder. A fund management structure in which one or more investment funds (feeder funds) pursue their investment program by investing in a separate affiliated investment fund (master fund).
Master fund. An investment fund through which an affiliated investment fund (feeder fund) pursues its investment program. A master fund may have multiple affiliated feeder funds.
Mutual fund. An open-end fund registered under the Investment Company Act that may issue and redeem shares on an individual basis each business day. Shares of mutual funds do not trade on an exchange. Mutual funds may be actively or passively managed, with most employing an active management strategy.
NASDAQ Stock Market LLC (Nasdaq). One of the largest U.S. securities exchanges. NextShares are listed and trade on Nasdaq.
National Securities Clearing Corporation (NSCC). A subsidiary of Depository Trust & Clearing Corporation that provides clearing, settlement and related services for most U.S. securities trades.
NAV-based trading. The patented trading method used in the exchange trading of NextShares. In NAV-based trading, the price of each executed trade equals the fund's next NAV, plus or minus a trading cost (premium/discount) determined in the market when the order executes.
Net asset value per share (NAV). For an investment company or similar entity, the total current value of assets held less the amount of outstanding liabilities, divided by the number of shares outstanding. U.S. registered investment companies normally compute NAV once each business day, as of the close of regular trading on the New York Stock Exchange.
NextShares. A new type of actively managed ETP. NextShares are registered investment companies regulated under the Investment Company Act whose shares trade on an exchange at NAV-based prices. NextShares funds may issue and redeem shares in Creation Unit quantities on a daily basis.
NextShares Solutions LLC (NextShares Solutions). A wholly owned subsidiary of Eaton Vance formed to develop and commercialize NextShares. Aspects of the operation of NextShares are protected intellectual property owned by NextShares Solutions.
Open-end fund. An investment company that may issue and redeem shares on an ongoing basis.
Passive (or passively managed). The management practices of an investment fund or account that seeks to match the returns of its performance benchmark. Contrasts with active investment management, which seeks to outperform the relevant performance benchmark.
Portfolio-protective. Describes an investment fund that protects the confidentiality of its portfolio trading information. NextShares is the only portfolio-protective exchange-traded product structure to receive SEC exemptive relief.
Premium. Price above NAV or other measure of value.
Primary market. Transactions in financial instruments in which the issuer of the instruments is a transacting party. The issuance and redemption of Creation Units by NextShares funds and ETFs, as well as the issuance and redemption of individual shares by mutual funds, are primary market transactions.
Redemption. Complete or partial withdrawal from an investment fund by a shareholder. Redemptions from NextShares funds and ETFs are limited to Creation Unit transactions by or through an Authorized Participants. Shares of a mutual fund are individually redeemable.
Secondary market. A financial market in which previously issued financial instruments are bought and sold. Unlike primary market transactions, trades in the secondary market normally do not involve the issuer of the instruments or change the number of instruments outstanding.
Securities and Exchange Commission (SEC). The principal regulator of securities markets and investment companies in the United States.
Share-based order. An order to buy or sell a specified number of shares of a security or other instrument. Contrasts to dollar-based orders, in which the dollar amount of the shares to be bought or sold is specified.
Total expense ratio (TER). The total amount of expenses incurred by an investment fund on an annual basis, expressed as a percentage of the fund's average net assets for the year. TERs typically include management fees, any 12b-1 fees, custody, transfer agency and other routine operating expenses of the fund. Stated TERs do not reflect fund trading costs or cash drag that detracts from fund returns.
Transfer agency expenses. Fees paid by an investment fund to its transfer agent or other intermediaries to process shareholder transactions and maintain shareholder accounts.
Transaction fees. The fees charged by NextShares funds and ETFs to Authorized Participants and other investors purchasing and redeeming Creation Units. Transaction fees are intended to offset the estimated costs to the fund of such transactions to avoid dilution of fund returns. NextShares transaction fees are limited to 2% of the amount of the purchase or redemption.
Unit investment trust (UIT). An unmanaged investment company that issues redeemable securities representing interests in a substantially fixed portfolio of assets. The first ETFs offered in the U.S. were structured as UITs.