ETF Industry’s $1T Mutual Fund Grab

January 11, 2023

In a recent column, CFRA Head of ETF Data & Analytics Aniket Ullal noted that roughly $40 billion in mutual funds had converted into exchange-traded funds in the past two years.  

And that’s just a trickle before the floodgates open. 

Nearly 40 mutual funds have been reborn as ETFs since Guinness Atkinson converted the first ETFs in March 2021, according to ETF.com data. More are certainly coming down the pike; Bloomberg Senior ETF Analyst Eric Balchunas projects $1 trillion in conversions over the next 10 years. 

For the near term, Ullal has tentatively projected that the total of $40 billion in converted assets may more than double, to $100 billion to $120 billion by the end of this year. ETF assets under management in converted ETFs currently total $61.5 billion, according to ETF.com data. Globally, $6.65 trillion in ETF assets are under management. 

“Fund complexes have recognized that the ETF wrapper is more efficient from a distribution and tax perspective for their shareholders, and that if they have the ability to simply convert the existing fund into the ETF wrapper, there's a lot of benefits to doing so,” Richard Kerr, a partner with law firm K&L Gates and a member of its asset management and investment funds practice group, told ETF.com in an interview. 

Because of their intraday trading capabilities, tax advantages and lower costs, ETFs have been stealing market share from mutual funds at a startling rate, with a recent Bloomberg News article pointing out a $1.5 trillion gap between flows into ETFs and out of mutual funds as of mid-December, the widest ever. For mutual fund issuers looking to grow as their section of the industry shrinks, conversions can be an attractive way to bring assets into the ETF space. 

And it seems to be working, especially for well-established mutual funds that convert. ETF conversions pulled in around $9.3 billion in 2022. However, the funds with the most inflows were almost all Dimensional products, with the seven funds the firm converted pulling in $9 billion on their own.  

A JPMorgan fund pulled in around $1 billion (the conversions don’t total $10 billion because several funds combined had nearly $1 billion in outflows). All other converted ETFs had flows ranging from $164.5 million in gains to $626.7 million in outflows.  

“A conversion puts you on second base right off the bat—you come in with assets, a track record and dignity,” Balchunas said in an interview with ETF.com. “I think that's important, because we've seen some people clone big active funds, and nobody cares.”  

“I think having assets is almost like good marketing,” he added. “If an advisor sees a Dimensional fund has $7 billion, [they think] there must be a lot of people into [it], even if that just came over from the mutual fund.”  

White Label Issuers  

Despite the dominance of just one major issuer in the space, white label issuers are converging on the trend. Conversions were recently a topic of discussion on Bloomberg News’ Trillions podcast, which featured Wes Gray of Alpha Architect, Mike Venuto of Toroso Investments and Garrett Stevens of Exchange Traded Concepts among its guests. All three guests lead white label firms that are heavily involved in mutual-fund-to-ETF conversions.  

“That’s pretty much exclusively what we’re doing right now,” Alpha Architect’s Gray said. “We’re all in on the conversion game at this point.” 

He estimates 90% of the roughly 30 funds his firm is working on launching this year involve some kind of conversion, whether it be from a mutual fund, separately managed account or hedge fund structure. 

“The ETF wrapper is just such a better vehicle that it really cannot be ignored, and if you’re a mutual fund company and you’re not thinking about this right now, you’re behind the curve,” Stevens noted.  

Balchunas said that in the wake of the podcast episode featuring the white label issuers, his initial estimate of $1 trillion in 10 years may be too low.  

 

Editor's Note: See Part 2: ETF Conversions' Pitfalls Eyed 

 

Contact Heather Bell at [email protected] 

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