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American Funds ETF Filing A Very Big Deal

July 28, 2014
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A single SEC filing may be the biggest ETF news of 2014.

On Friday, a new petition seeking the right to offer non-transparent active ETFs titled "The Capital Group ETF Trust" went into the regulatory pipeline at the Securities and Exchange Commission. It might be the biggest ETF story of the year.

That filing follows the fairly standard boilerplate we've seen from State Street, BlackRock and Invesco PowerShares. That boilerplate points to the ETF structure being put forth by Precidian investments, which itself has also filed to run nontransparent active ETFs.

There are several reasons this is enormously big news.

It's American Funds

Don't let the name fool you, the Capital Group is the actual company behind American Funds, a $1.1 trillion juggernaut of traditional active management. We've been on the record for some time saying it was just a matter of time before one of the big, single-focus active management companies like American Funds, Janus or Gabelli jumped into the nontransparent active arena.

But if there were a clear one you'd want to see as the signal, it would be American Funds. Why?

Consider what the top 20 traditional mutual funds are in this country as of this morning:

Ticker Name Assets ($, M)
VTSMX Vanguard Total Stock Market 302,750.75
PTTRX PIMCO Total Return 225,216.39
VINIX Vanguard S&P 500 175,529.09
VFINX Vanguard S&P 500 160,371.66
AGTHX American Funds Growth Fund of America 143,050.30
AEPGX American Funds EuroPacific Growth 128,067.80
VGTSX Vanguard Total International Stock 127,006.24
FCNTX Fidelity Contrafund 109,600.20
VBTIX Vanguard Total Bond Market 97,407.80
CAIBX American Capital Income Builder 96,439.96
FRIAX Franklin Income Fund 96,105.10
AMECX American Funds Income Fund of America 95,102.80
CWGIX Capital World Growth 89,425.39
VWELX Vanguard Wellington 86,560.92
VTBIX Vanguard Total Bond Market 81,828.84
FUSEX Fidelity Spartan S&P 500 75,923.15
ABALX American Funds Balanced 75,626.44
AWSHX American Washington Mutual Investors 74,519.69
AIVSX American Funds Investment Company of America 74,219.55
TPINX Templeton Global Bond 72,490.00

Of the top 20, seven are index funds, and eight are active funds run by Capital Research & Management, the parent company behind the American Funds. Sure, the Pimco Total Return Fund run by Bill Gross is the biggest actively managed fund, but American Funds is the heart and soul of old-school stock-picking active management.

And to be blunt, times have been a bit rough for American Funds.

As Bloomberg pointed out in an expose last year, American Funds shed $250 billion via withdrawals between January 2008 and the end of 2013. By the end of 2013, American Funds went on a bit of a reputation-rebuilding campaign, which has seemed to work. Its funds—like the funds of most old-school active managers—have their good years and bad years.

Perhaps most importantly, American Funds has a sterling reputation with the same important constituents that ETF issuers covet; namely, smart financial advisors. With the horrible 2008 returns data rolling off the five-year performance charts, many of American's flagship funds have come back into the black in the rearview mirror. More to the point, brand surveys suggest they have advisor trust.

And despite recent suggestions it wasn't interested in ETFs, American Funds is now filing to enter the 21st century. As skeptical as I am in general about active management, for the raft of financial advisors who've come to rely on American Funds, this gesture to offer nontransparent active ETFs should be seen as a good thing.

 

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