Mutual Funds Take New Routes To ETFs

January 24, 2014

More and more firms are finding new ways to get a piece of the ETF action.

Two mutual fund firm stalwarts, TCW and MFS Investment Management, are finding new ways (short of creating and launching their own funds) to bring exchange-traded funds—usually active strategies—to market, by teaming up with existing issuers, at a time ETFs are taking off.

To be sure, a plethora of mutual fund firms and insurance companies have begun laying the regulatory groundwork to offer their own ETFs in the past few years, most recently, the insurer Prudential. But precious few—with the exception of Pimco, Fidelity and most recently, Franklin Templeton—have actually launched ETFs.

That said, Fidelity has done both—it now has a small and growing family of proprietary ETFs, and it’s in a partnership with iShares to create index ETFs, use iShares ETFs in Fidelity managed accounts and allow 65 iShares ETFs to trade commission free on the Fidelity platform.

In all the maneuvering, what is totally clear is that since the first ETF came to market 21 years ago, the world of ETFs continues to slowly and steadily expand, with $2 trillion in assets under management now in sight. That’s far less than the $13 trillion in open-end mutual funds or the $6 trillion in hedge funds, but the writing’s on the wall, and no one wants to be left out.

State Street And MFS

This month, State Street Global Advisors launched three actively managed equity ETFs in partnership with MFS Investment Management—the very firm that launched the world’s first mutual fund in 1924.

Both firms are touting the new ETFs as beneficial to investors because of “a focus on managing downside risk.” The launches come at a time when interest rates are rising and the Federal Reserve is pulling back on its five years of monetary stimulus.

The three new ETFs include:

The funds’ annual expense ratios are each 0.60 percent, or $60 for every $10,000 invested—not dirt cheap as ETFs go, but a lot less expensive than the average mutual fund.

Dan Flaherty, a spokesman for MFS, said the firm currently doesn’t have any plans to get into the ETF business directly or subadvise on other funds.

“We saw an opportunity with some strategies that had not gained traction in the high net worth and separately managed accounts area,” said Flaherty.

“We do remain dedicated to our core strategy of actively managed products and we viewed this as an opportunity to leverage an existing capability that we had and to take advantage of what we see as a developing trend in active ETFs,” he added.

Emerging Global And TCW

Also, Emerging Global Advisors—the purveyor of the $1.25 billion EGShares Emerging Markets Consumer ETF (ECON | D-51)—made a splashy start in the fixed-income space by launching a trio of emerging-market investment-grade bond ETFs with the TCW Group.

The new bond funds include the:

  • EGShares TCW EM Short Term Investment Grade Bond ETF (SEMF)
  • EGShares TCW EM Intermediate Term Investment Grade Bond ETF (IEMF)
  • EGShares TCW EM Long Term Investment Grade Bond ETF (LEMF)

TCW currently manages some $10 billion in emerging market debt spread across four active mutual funds and separate accounts. But it’s a newcomer to the ETF space and will subadvise the funds.

Penny Foley, group managing director of Emerging Markets Strategies at TCW, said that since this is a new product market for the firm, there are no decisions yet to incorporate ETFs into its mutual funds or separate accounts, or launch its own ETFs going forward.


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