William Shakespeare’s play, King Lear, is remarkable in many ways, not the least of which is its portrayal of the often antagonistic relationship (to put it mildly) between kids and parents. Lear hands his oldest daughters the keys to the kingdom and they promptly boot him out of the house and into the storm, with only the clothes on his back and his Fool to keep him company.
So what does Lear’s relationship with his unruly children have to do with exchange-traded funds (ETFs)? Well, as innovation continues to drive new product development, there is increasing pressure on big investment managers to spawn ETF-type offspring for their flagship mutual fund products, particularly in the active ETF space where the number and range of products under development is growing rapidly.
In the asset management space, the relationship between active ETFs and active mutual funds is rather like that uneasy relationship between the older generation and the kids. Those new and shiny active ETFs promise all the benefits of skilled and experienced management on the cheap.
The question is, can both products exist under one roof? Or will the young upstarts kick the old guard out onto the heath?
If you use Pimco as an example, you can see how the two products (old and new) are living together in perfect harmony. The firm launched an ETF version of its flagship Total Return Bond Fund in March 2012 and since then has become the dominant player in the active ETF space — right now, two of its active ETFs account for more than half the assets held in all actively managed ETFs in the U.S.
Still, other firms are sitting on the sidelines. While some of the world’s biggest mutual fund companies have received exemptive relief to launch ETFs, they haven’t yet taken the leap. Fidelity, Franklin Templeton, John Hancock and Legg Mason all have the go-ahead from the U.S. Securities and Exchange Commission to launch products, but they haven’t done so according to ETF Trends.
News out last week, however, shows at least one big manager finally taking the plunge. Institutional Investor reports J.P. Morgan Asset Management, which announced plans to cut 100 active mutual funds and trim 17,000 jobs, could be preparing for a big push into active ETFs. The article quotes Todd Rosenbluth, director, ETF and mutual fund research for S&Q Capital IQ, who notes that while there is not enough information to directly link the cuts and the company’s plans to launch active ETFs, it would be advantageous for J.P. Morgan to consider the move, particularly from a global standpoint. ETFs can be sold outside of the country where the fund is domiciled—mutual funds can’t.
The article goes on to speculate that those investment firms who have exemptive relief to launch their own active ETFs are indeed getting ready to do so—and soon.
One barrier, however, could be the level of transparency required, which might have some active managers spooked. ETFs are required to disclose portfolio holdings daily—and that could just could give too close a peek at what’s under the hood for many managers.
Still, it’s worked for Pimco on the fixed income side—now it’s time for some of the big equity managers to give it a whirl. Done right, active ETFs could be a great addition to the mutual fund family and not necessarily a pelican child ready to eat up its mutual fund parents.