Analysts Warn Not to Write Off Morgan Stanley's Tepid ETF Launch

Nearly three months in existence, Morgan Stanley’s suite of sustainability-focused exchange-traded funds has gathered about $270 million in total assets under management. 

Anthony Rochte, global head of ETFs at Morgan Stanley Investment Management, told etf.com that flows and engagement were what the firm expected them to be at this stage, and investor reception has been good for the six Calvert Research Management ETFs it launched on Feb. 1. 

“There's been good uptake, certainly from the registered investment advisor channel, and from some institutional clients out of the gate,” he said. 

Yet given the name recognition of both Morgan Stanley and Calvert, a pioneer in environmental, social and governance investing, $270 million across six ETFs might be considered tepid. The bulk of those assets are in the Calvert US Large-Cap Core Responsible Index ETF (CVLC), which has $144 million and which was seeded with $20 million. Rochte said that fund averages about 67,000 shares traded daily.  

AUM for the other five Calvert ETFs, the Calvert Ultra-Short Investment Grade ETF (CVSB), Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF (CDEI), Calvert US Mid-Cap Core Responsible Index ETF (CVMC), Calvert International Responsible Index ETF (CVIE) and Calvert US Select Equity ETF (CVSE), range between $20 million and $30 million each.  

“While there certainly have been headwinds in the ESG category that I think we're familiar with … what our clients tell us is they know Calvert, they like Calvert,” he noted, adding that Calvert’s mutual fund products saw net inflows in 2022. 

Although Rochte didn’t elaborate about the specific ESG headwinds, the investment style underperformed in 2022 when fossil fuel energy rallied and technology fell. The investment style has also come under political criticism.  

Still Early Innings 

Aniket Ullal, head of ETF data and analytics for CFRA Research, says successful ETF launches have two elements: a strategy that’s well-timed to the market cycle and a distribution advantage.  

He agrees that sector performance and political winds are dragging ESG. It also takes time for distribution to ramp up, another reason for a tepid start. Both of those considerations make it too early to judge the platform, he added. 

“We think that they can still be successful,” Ullal said. 

He noted that both JPMorgan and Capital Group had sluggish ETF launches in their respective debuts, but funds from both firms have successfully gathered assets.  

“Two years ago, people were wondering why JPMorgan hadn’t gotten more traction, but since then, we’ve seen them significantly step up,” he explained. 

JPMorgan’s experience illustrates Ullal’s point about timing and distribution. Its JPMorgan Equity Premium Income ETF (JEPI), a low-volatility, covered call strategy, outperformed in 2022’s market cycle and is now one of the biggest active ETFs by AUM. The firm also gathered distribution momentum, including bringing some of its own assets.  

“That combination was ideal for them and probably gave them more momentum for other ETFs in their franchise. It's very conceivable to me that Morgan Stanley would be able to do something similar,” he noted. 

Ullal said that, in the past six months, midsize fund issuers such as JPMorgan, Capital Group and Dimensional Advisors have taken an increasing share of asset flows from the industry’s titans: Vanguard, BlackRock and State Street.  

Midsize Issuers Bringing Other Strengths to ETF Space

Dimensional has strong product loyalty from advisors, JPMorgan has its huge wealth management business and Capital Group is one of the biggest active mutual fund companies that also has significant advisor loyalty, Ullal said. That leaves room for Morgan Stanley to carve out its niche. Plus, the firm has hired veteran ETF managers, such as Rochte, to lead the business.  

Given Morgan Stanley’s lineup, distribution strength and leadership, “they probably could be a pretty significant player,” Ullal added. 

This is Morgan Stanley’s return to the ETF’s ecosystem after launching ETFs in the 1990s. Rochte noted that the firm has plans to launch other products based on brands it owns, including Parametric, Eaton Vance and other Morgan Stanley products. 

‘We’re not looking at an ETF launch over the next five to 10 months; we’re looking over the next five to 10 years,” Rochte commented.