Capital Group Nabs $8.5B Corner of ETF Space

Capital Group Nabs $8.5B Corner of ETF Space

In just over a year, the firm has landed 2% of the active fund market, incoming CEO says.

Reviewed by: Lisa Barr
Edited by: Ron Day

In a little over a year, Capital Group muscled its way into the exchange-traded fund business, grabbing market share in the small-but-growing active ETF field. 

It now commands 2% of that market, according to incoming Capital Group CEO and President Mike Gitlin. It is readying new active ETFs for a fall launch, having just filed for three funds: the Capital Group Core Balanced ETF (CGBL), the Capital Group International Equity ETF (CGIE) and the Capital Group World Dividend Growers ETF (CGDG).  

Four of the nine ETFs launched last year already have $1 billion in assets under management each: the Capital Group Dividend Value (CGDV), Capital Group Growth ETF (CGGR), Capital Group Global Growth Equity (CGGO) and Capital Group International Focus (CGXU). Both CGDV and CGGR hold nearly $2 billion each in AUM.  

Just 14 months ago, the asset manager had zero ETFs, and now it has $8.5 billion in total ETF AUM as of April 18. With thousands of ETFs launched every year, it’s hard to stand out at all, let alone debuting funds in the middle of the worst stock and bond markets in decades. 

Holly Framsted, head of global product strategy and development at Capital Group, attributed the successful launch to creating ETFs that financial advisors could use as asset allocation building blocks.  

“The financial advisors we interact with are increasingly building portfolios that look like a model, and they needed key building blocks,” she told on the sidelines of the Morningstar Investment Conference April 27. “We had also long heard the desire for active management in the ETF vehicle.” 

Framsted suggested 2022’s market turmoil may have worked in their favor. Tax-loss harvesting by advisors meant they could add the funds sooner than they might have done otherwise. Additionally, she said advisors may have looked to the firm for asset allocation decisions, citing the takeup in international funds like CGGO and CGXU.  

“I think that's financial advisors telling us that in an environment rife with uncertainty, they're looking to Capital Group to decide how much of their equity allocation should be invested domestically versus internationally and in emerging markets,” she said, categories that historically haven’t been popular for index exposure. 

New Business 

Much of Capital Group’s $1.7 trillion in total assets are in its mutual funds, many of which are stalwarts in 401(k) plans. The firm has about 15% of the active mutual fund market share, Gitlin told Morningstar Conference attendees this week. 

Neither Framsted nor Gitlin said they are concerned about the ETF business growing at the expense of its mutual funds, saying that the ETFs are not clones of existing mutual funds, but complementary services. Gitlin said Capital Group data shows about 6,500 advisors to date have used its ETFs, with 12% of those new to the firm’s investment services, while the others were clients looking for a new vehicle. 

The firm also isn’t worried about the active ETFs getting too big to manage. Unlike mutual funds that can close to new investors, ETFs can’t. Gitlin says Capital Group’s unique portfolio management structure, where analysts can invest alongside managers, puts it in a position to handle capacity as the business grows. 

“It’s helpful when you have 400 investment professionals all expressing their own highest conviction in multiple different investment units,” he said. 

Long known as an equity shop, Capital Group has spent the past few years enhancing its fixed income offerings. Gitlin said in the past five years in the U.S., the firm’s bond funds have grabbed one-third of the industry’s net flows, and that the firm’s fixed income AUM is nearly double what it was eight years ago, around $500 billion.  

The firm is banking on the idea of a growing active ETF landscape and greater bond flows. Framsted said the continued growth in this area may change the view that ETFs are just index vehicles.  

Gitlin believes the bond market is poised to see more flows, with markets predicting what the Federal Reserve will do around interest rates. Active bond ETFs are poised to benefit from this activity. 

“I think we'll see probably a trillion dollars of net flows move into the bond markets in the next few years,” he said. 

Debbie Carlson focuses on investing and the advisor space for U.S. News. She is an internationally published journalist with bylines in publications including Barron's, Chicago Tribune, The Guardian, Financial Advisor, ETF Report, MarketWatch, Reuters, The Wall Street Journal and others.