Hartford Funds Jumps on ETF-Conversion Bandwagon

Hartford Funds has become the latest legacy mutual fund complex to jump on the ETF-conversion bandwagon, with its launch this week of the Hartford Quality Value ETF (QUVU). 

Converted from the $250 million Hartford Quality Value mutual fund, which dates to 1996, QUVU joins the list of approximately 60 ETF conversions since the first in March 2021. 

“There are many routes to the ETF space, and conversions are just one of them,” said Eric Balchunas, ETF analyst at Bloomberg Intelligence.  

“Conversions will make sense for many fund companies but not for everyone because change is hard,” he added. 

As financial advisors—the biggest buyers of ETFs—continue to migrate toward the lower cost, more tax efficient and user-friendly ETF wrapper, legacy fund companies such as Hartford have seen the writing on the wall and are adjusting accordingly. 

Hartford, which has $130 billion in more than 50 mutual funds, entered the ETF space in 2016 through the acquisition of Lattice Strategies. Including QUVU, Hartford now has 16 ETFs and is keeping an open mind for more conversion opportunities. 

“We have been looking for a candidate to convert because we’ve heard from investors that they find the advantages of the ETF structure to be compelling,” said Thomas McConnell, head of product innovation and implementation at Hartford Funds. 

McConnell said Hartford started with the large-cap value mutual fund, subadvised by Wellington Management, because it has “good performance and the portfolio management team was comfortable offering a fully transparent ETF.” 

Hartford Converts Mutual Fund to QUVU ETF

QUVU, which carries the former mutual fund’s track record, is down 1.7% from the start of the year, up 11.9% over the trailing 12 months, and has a 10-year annualized return of 7.97%. 

Of the $250 million in the mutual fund, $165 million came along with the ETF conversion. McConnell said the conversion rate was expected because many of the original investors owned the mutual fund directly and did not have access to a brokerage account required to own the ETF. 

Aniket Ullal, head of ETF data and analytics at CFRA, estimates total converted ETF assets to be around $80 billion, double the amount at the start of the year when he forecasted converted assets to reach $100 billion this year. 

While a full two-thirds of the converted ETF assets are from Dimensional Fund Advisors, Ullal said the mutual fund industry is seeing the benefits and testing the waters. 

“They are able to carry over the mutual fund performance records and the fund assets,” he said. “We see it as a fairly effective strategy, which is why you’re seeing asset managers like JPMorgan, Capital Group and Fidelity doing it.” 

Of course, it’s not always easy for legacy mutual fund complexes to walk away from the higher fees and access to qualified retirement plans where mutual funds still rule. 

In addition to losing the ability to incentivize various intermediary channels to sell mutual funds, the mutual fund companies also experience an average expense ratio reduction of 20 basis points when converting to an ETF. 

James Seyffart, ETF research analyst at Bloomberg Intelligence, stacks ETF conversions alongside ETF share classes as major contributors to the next wave of growth in the ETF space. 

While the Securities and Exchange Commission has yet to approve an ETF share class for a mutual fund, Seyffart believes the floodgates are about to open following the May expiration of a patent held by Vanguard enabling ETF share classes. 

“Combined, ETF conversions and ETF share classes will be in the hundreds of billions of dollars in the next few years,” he said. “The end goal is to get more distribution using the ETF wrapper.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenJiWriter