A filing from Morgan Stanley early this week indicates one of the country’s top asset managers will be reentering the exchange-traded fund space after more than 25 years.
The funds are expected to launch by spring 2023, according to a report from Pensions & Investments, which also noted that the firm had hired industry veterans Anthony Rochte, previously of Goldman Sachs, and Allyson Wallace from BlackRock.
It’s easy to forget that Morgan Stanley was one of the first movers in the ETF space, launching the World Equity Benchmark Series, a business that was eventually sold to BGI to form the core of its iShares country ETF lineup. iShares is currently the largest ETF issuer in the world.
The WEBS were a key development in the ETF industry because they were the first ETFs to have ’40 Act exemptive relief rather than being structured as unit investment trusts as many early U.S.-listed ETFs were.
Indeed, the SPDR S&P 500 ETF Trust (SPY) still uses that structure, as does the Invesco QQQ Trust (QQQ). Today almost all ETFs are structured as 40-Act funds due to the structure’s favorable qualities, such as its lack of termination date and its treatment of dividends.
Robert Tull, now co-founder and president of Procure Holdings, who has been credited as one of the Morgan Stanley employees behind the term “exchange-traded fund,” notes the firm’s missed opportunity, commenting the managing director in charge after he left did not believe in the product and sold off the assets to recoup the development costs.
Barclays Global Investors acquired the WEBS for the stunningly low cost of one dollar, according to Tull, while other related assets were sold to Citi for $5 million.
Tull says his team had integrated the product throughout Morgan Stanley’s business units, which had previously been siloed and did not communicate much with each other. “ETFs [were] a way for me to knit the firm into a single business line,” he said.
“Not only did they have the ETF business, but they had Morgan Stanley Trust Company servicing it, they had the international stock loan desk doing the lending for the ETFs,” Tull added, noting other in-house synergies such as dividend arbitrage that added incremental income to returns and foreign currency at Morgan’s FX desk.
Essentially, Morgan Stanley entered a new investment space with a number of key advantages, but left the playing field before the first inning was even over.
"The managing directors in charge of the equity division believed that ETFs were going nowhere, that they were in essence an ill-fated product or ill-conceived product," Tull recalled.
Six ESG ETFs
This time around, Morgan Stanley is taking a very different approach from its original foray, having filed for two actively managed and four index-based ESG funds carrying the Calvert brand. Calvert Research and Management is a Morgan Stanley affiliate and a well-established ESG manager.
The funds included in the filing, which does not include tickers or expense ratios, are as follows:
- Calvert US Select Calbert Equity ETF
- Calvert Ultra-Short Investment Grade ETF
- Calvert International Responsible Index ETF
- Calvert US Large-Cap Core Responsible Index ETF
- Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF
The U.S. Select equity fund doesn’t rely primarily on ESG screens, but instead targets top-performing companies offering solutions to ESG-related concerns through their business activities, weighting components that have strong ESG qualities themselves more heavily. The fund also uses corporate engagement to further advance its goals. The fixed income ETF applies ESG principles to the bonds included in its portfolio in addition to other selection strategies.
The three index funds with the ‘Responsible’ label look to be ETF versions of existing mutual funds offered by Calvert. Their indexes rely on 200 key performance indicators associated with ESG criteria to select components. Their mutual fund counterparts range in size from $338 million to $6.7 billion and their lowest net expense ratios range from 0.24%-0.29%, suggesting their ETF versions will be even lower in terms of costs.
Meanwhile, the Diversity, Equity and Inclusion ETF’s index targets companies that have diverse workforces and inclusive cultures, among other criteria. Several ETFs focus on DEI concerns, with one of the largest being the $41 million Impact Shares NAACP Minority Empowerment ETF (NACP).
Contact Heather Bell at [email protected]