Morgan Stanley Returns to ETFs With Oversight Role

Morgan Stanley is making initial steps back into exchange-traded funds after a more than 20-year absence, as its subsidiary Parametric Portfolio Associates takes on an oversight role with a new fund. 

Parametric, which Morgan Stanley bought last year as part of its $7 billion Eaton Vance purchase, will be the subadvisor to Innovator ETFs' latest, the Innovator Equity Managed Floor ETF (SFLR). The fund, launched today on the NYSE Arca, invests in large cap stocks with an option portion overseen by Parametric that seeks to limit annualized losses to 10%, according to a fact sheet. 

Morgan Stanley in August said it’s returning to the $6.3 trillion ETF market with fund launches next spring. It was an early player in the industry, creating the World Equity Benchmark Shares in the 1990s before selling them to Barclays Global Investors. WEBS reportedly sold for $1 and became iShares, now the world’s biggest ETF issuer, with $2.1 trillion under management and owned by BlackRock Inc.  

Morgan Stanley is moving back in as the ETF industry has nearly doubled from $3.3 trillion in assets in 2017. While the industry is growing, it’s been challenged this year by falling stock and bond markets and potential saturation of product lines. Fewer new funds are launching this year, while closures have jumped.  

Subadvised by Parametric and issued by Innovator, the new fund is designed as a “core portfolio” product and offers exposure to the performance of S&P 500 stocks alongside an options strategy. Innovator is known for its defined outcome ETFs that generally cap upside exposure to equity markets while protecting against a fixed level of downside performance.  

The fund was designed “to help investors limit equity market drawdowns while gaining exposure to equities’ dividend income streams,” Innovator CEO and co-founder Bruce Bond said in a statement. It may also help with “upside potential during strong positive market environments,” he added.  

This is achieved via an options strategy. However, SFLR does not have any cap on upside, and it aims to limit losses to a 10% decline, or “floor,” over any 12-month period.  

The fund’s equity portfolio is basically a representative sampling of the S&P 500’s components, which will provide dividend income in addition to equity performance, while SFLR’s hedging strategy for achieving the floors is implemented via laddered options positions, which a press release says is also designed to “maximize upside potential.” The fund’s prospectus notes that the 10% floor is not guaranteed.  

Contact Heather Bell at [email protected]