Morgan Stanley Files for Its First Mutual Fund Conversions

The firm plans to convert two bond funds with over $700 million in assets.

Morgan Stanley filed for its first mutual fund to exchange-traded fund conversions this week. 

That move, combined with its launch of several ETFs earlier this year, marks the firm’s return to the sector after it helped to create some of the first ETFs in the 1990s. 

The $1.4 trillion asset-management titan is converting two actively managed bond funds from Eaton Vance: the Core Plus Fixed Income Portfolio and Short Duration Municipal Income Portfolio. According to its filing, Morgan Stanley expects the funds will relaunch on March 22, 2024 as the Eaton Vance Total Return Bond ETF and the Eaton Vance Short Duration Municipal Income ETF.  

The two ETFs will have “substantially similar” strategies as the mutual funds, and Morgan Stanley expects the ETFs will have lower fees than their previous incarnations, but the size of the fee cut wasn't disclosed. Morgan Stanley declined to comment. 

The conversions will likely find a better reception than the six ETFs Morgan Stanley launched earlier this year. Those funds have a combined $386 million in assets and focus on environmental, social, and governance, or ESG, investing, which has fallen out of favor this year after poor performance in 2022. Both are also active funds, which have been in vogue this year. 

“We expect big things from Morgan Stanley,” Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, said in an interview. 

Morgan Stanley Was an ETF Pioneer 

Morgan Stanley’s status as a latecomer is ironic because the firm created some of the first ETFs over two decades ago. Balchunas even credits Morgan Stanley with coining the term “ETF.” The country funds it helped make, and then sold, include what is now the iShares MSCI Japan ETF (EWJ), which has more than $12 billion in assets. 

“We call it their ‘Xerox moment,’ Xerox was the big tech company in the '80s, and they let Microsoft and Apple look in their closet and turn the stuff they discarded into a massive industry,” Balchunas said.  

“I think the growth took everyone by surprise, and I don’t think Morgan Stanley was alone in reacting late, though the early incumbents have developed significant advantages by being early,” Aniket Ullal, head of ETF data and analytics at ETF data and research firm CFRA, said in an interview. 

DFA Dominates Conversion Market 

The ETF conversion market is now dominated by Dimensional Fund Advisors. According to Balchunas, out of the DFA runs $58 billion, 77%, of the $75 billion in assets in ETFs that were converted from mutual funds,.  

DFA was an early adopter of the conversion strategy, converting its funds shortly after the first conversion by Guinness Atkinson in 2021. It’s kept that advantage, and the largest seven converted ETFs are all DFA funds.  

Despite being a relative latecomer to the field, Morgan Stanley’s size may give it a better chance to catch up than smaller firms. Balchunas emphasized the advantage of conversions over new fund launches is that they allow firms to bring over existing assets and that “assets are marketing.” 

Ullal agreed, saying the size of a firm matters, and if it can bring assets to the table, then that will be a major factor in its ability to make up for lost time. 

One other advantage Morgan Stanley has is the unrivaled size of its network of advisors. 

“Their advisor network is $4 trillion, no one is close to that. Four trilliion dollars blows everyone else away. It’s effectively an enormous captive audience,” Balchunas said.