The Trend
A growing number of established mutual fund companies, including T. Rowe Price and Dimensional Fund Advisors, are launching ETFs by either converting existing mutual funds or maintaining those funds and launching ETF look-alikes, adding to the growing number of ETF assets.
Citigroup analysts project that ETF assets will eventually outnumber mutual fund assets, which currently total $21 trillion — about four times the level of ETF assets.
The Drivers
- Advisor demand for ETFs, especially for taxable accounts (ETFs are more tax-efficient than mutual funds)
- The SEC ETF Rule 6c-11 under the 1940 Act, which allows all passive and active transparent ETFs to make use of custom baskets. The rule also allows for faster ETF launches because asset managers no longer have to file for exemptive relief every time they launch a new ETF. The rule took effect in late December 2019, but asset managers had a one-year window to achieve full compliance.
- The emergence of semi-transparent ETFs, which began in spring 2020 about a year after the SEC approved the first of several nontransparent ETF structures
- Lower fees, which can attract more investors and help asset managers grow assets and stem outflows
The Buzz
Tim Coyne, global head of ETFs, T. Rowe Price:
(Note: T. Rowe introduced its first ever ETFs in August 2020 — four active semi-transparent equity ETFs that are similar to existing equity mutual funds, bringing in around $290 million in assets — and a fifth this month.)
"ETFs allow clients to reach our strategies through a new pathway. … The benefits to clients are lower operating costs and enhanced tax efficacy through the creation and redemption mechanism of ETFs which appeals to taxable clients, retail and institutions.
"We're pleased with the level of client engagement [with our ETFs] … and have plans to continue to develop our ETF product suite across equities and fixed income. We're in the process of developing fixed income capabilities ETFs for our ETF plan later this year…. Many advisors have developed a preference for ETFs as an investment holding. ETFs give T. Rowe Price the opportunity to expand our reach particularly across the advisor universe and broadly across [other] intermediaries. Also, ETFs on most platforms are commission accessible through brokerage accounts."
On why T. Rowe Price didn't go the mutual fund conversion route when introducing ETFs, Coyne said: "If you look at the asset base of T. Rowe Price, a significant amount is in retirement accounts. From an operational standpoint [conversions] would be challenging."
On why the firm chose to introduce semi-transparent active ETFs: "Semi-transparency protects our intellectual property, and through proxy baskets and intraday metrics you can see performance of proxies relative to actual fund holdings."
(All of the firm's active ETFs use a proprietary proxy basket that provides market makers the information they need to quote prices confidently while protecting the "secret sauce" of portfolio managers' operations to avoid front-running).
Marlena Lee, head of investment solutions, DFA:
Note: Dimensional Fund Advisors, which sells its mutual funds exclusively through financial advisors, launched its first-ever ETFs in November and December, and this week the firm launched four of six planned active equity ETFs that were tax-free conversions of tax-managed mutual funds. It expects to launch the other two active ETFs this September. All of its ETFs are fully transparent.
