Old school fund companies Goldman, JPMorgan wade deeper into ETF market

Embracing the reality of where the money is headed

Sep 16, 2016 @ 11:44 am

By Jeff Benjamin

Old-line asset management shops are continuing to wade deeper into the ETF market, seemingly embracing the notion that 'if you can't beat 'em, join 'em.'

Over the past few weeks, Goldman Sachs Asset Management, JPMorgan Asset Management, and Nuveen have all marked respective “firsts” with regard to exchange-traded funds.

The JPMorgan Disciplined High Yield (JPHY) is J.P. Morgan's first fixed-income ETF.

The ETF will face stiff, established competition from the Pimco Total Return Active ETF (BOND), and the SPDR DoubleLine Total Return Tactical ETF (TOTL), as well as passive high-yield bond ETFs, SPDR Barclays High-Yield (JNK), and iShares iBoxx High Yield Corporate Bonds (HYG).

The Goldman Sachs Treasury Access 0-1 Year (GBIL) is the first ETF to offer same-day settlement of creation and redemption in the short-term Treasury market, which essentially makes it a money market substitute.

And Nuveen's NuShares Enhanced Yield U.S. Aggregate Bond (NUAG) is the first product launched on the NuShares ETF Platform.

The recent launches follow patterns of expansion in the ETF space by firms such firms as John Hancock Financial Services, Legg Mason, and Franklin Templeton, according Todd Rosenbluth, director ETF research at S&P Global Market Intelligence.

“You don't just enter the ETF market lightly, and a lot of companies have started paying more attention to building ETF lineups,” he said.

In terms of the recent string of bond ETFs, Mr. Rosenbluth said, “The appeal of getting in is the significant money that has gone into fixed-income ETFs, and these active-management firms like JPMorgan have a lot of prowess in that area.”

JPMorgan, which launched its first ETF in June 2014, now has 10 products and $850 million in ETF assets.

But they are just getting started, according to Joanna Gallegos, head of product development for ETFs at JPMorgan.

The company currently has a multi-sector global fixed income ETF, and an ultra-short bond ETF in registration.

“The appeal of ETFs for us is we're able to reach new client segments and expand our business,” Ms. Gallegos said. “We will continue to launch products over the next few years.”

It's a similar story at Nuveen, which is an operating division of TIAA Global Asset Management.

Nuveen's new strategic-beta ETF, which is designed to squeeze maximum yield out of a broad bond universe is just the beginning, according to Martin Kremenstein, managing director and head of ETFs at Nuveen.

“We're bringing strategic-beta methodology to the fixed-income world, and this is quite different from anything we already offer,” he said. “There are lots more planned, but what we've done with this new ETF is a good guide of what we have planned.”

So far, none of these firms are suggesting a move away from traditional open-end mutual funds as they migrate into the ETF space, and the mutual-fund industry at $12.5 trillion still towers over the $2.4 trillion ETF market.

But the trend toward ETFs continues to mount.

According to Morningstar, U.S. open-end mutual fund assets are sitting at an all-time high, but so far this year the industry has suffered more than $8.7 billion in net outflows, which follows $35.1 billion in net outflows last year.

The total number of distinct funds, not counting multiple share classes, stands at 8,155, down from 8,208 in December.

ETFs, meanwhile, are in the midst of a growth spurt, including net flows this year of more than $141 billion, following two consecutive years of more than $240 billion in net inflows.

Morningstar counts a total of 1,927 ETFs, up from 1,848 in December.

“It's nice to see some legitimate firms coming into the ETF space,” said Matt Collins, head of U.S. product operations at ETF Securities.

“Generally, it seems like what the fund companies are offering in the form of ETFs is what they've done for decades, but some of the business dynamics of active management and/or higher fees is putting pressure on the way they've always done things,” he added.

Since roughly 80% of his firm's $22 billion in ETF assets is in specialized commodity strategies, Mr. Collins doesn't yet see a major threat from the giant asset managers pushing deeper into ETFs.

But, he said, the potential to have an impact on the ETF space is there.

“Their presence will be felt in the marketing dollars they spend, because they have the ability to allocate huge amounts of money,” Mr. Collins said. “They also have huge distribution networks, but the trick for them might be finding a way to leverage that distribution by giving each product enough attention.”

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