American Funds to get approval to offer ETFs

Massive mutual fund operation could come storming into a popular investment product

Feb 4, 2015 @ 10:43 am

By Trevor Hunnicutt

In a move that could pave the way to a new order in the fund industry, securities regulators plan to approve a proposal by American Funds, the third-largest mutual fund brand, to offer ETFs for the first time.

The decision, announced this week by the Securities and Exchange Commission, clears the way for the manager of $1.2 trillion in mostly broker-sold mutual funds to build its own exchange-traded funds, a product that has most of its assets flowing into products that replicate an index. American Funds is the largest mutual fund manager without a lineup of ETFs.

It remains unclear if American Funds will bring ETFs to market. After the commission staff’s decision was announced late Monday, Tom Joyce, a spokesman for American Funds parent, Capital Group Cos., said the company is “leaving our options open at this point.”

“We continue to have interest in the concept of active ETFs,” Mr. Joyce said. “But, this approval aside, we have no immediate plans to offer ETFs of any kind. This allows us to consider, to explore and to have conversations with the industry participants.”

Still, the company’s active interest — including two proposals filed since July — indicate the seriousness with which mutual fund managers are treating ETFs, once a backwater but now the fastest-growing asset management product, in part because of the growing number of advisers who rely more on fees charged directly to clients than on commission revenues paid by fund houses.

American Funds sells only through financial advisers and brokers, but that’s an increasingly tough business, and the company has had seven straight years of redemptions totaling $261 billion, according to an estimate by Morningstar Inc. Most of those outflows have come in “load” funds, which are sold by financial advisers and brokers who collect commissions from the sale. ETFs provide no such remuneration to the adviser.

“American Funds has gone through a very, very difficult period and have come through it reasonably well,” said one top industry consultant who declined to be named. “They realize they really have to be a full-time participant in the industry. They can’t be above the fray.”

Perhaps ironically, Los Angeles-based Capital Group is partly responsible for the popularity of index-based investing. A Capital subsidiary in the 1960s invented MSCI indexes tracking international markets. While MSCI Inc. is now independent, it retains the “C” in its name, which once stood for “Capital.” In the U.S., an estimated $269 billion in ETF assets track MSCI indexes, according to Morningstar.

Before last year, American Funds maintained that it had little interest in the ETF market, in large part because of holdings transparency.

The filing by American Funds that the SEC is poised to approve would require it to disclose its holdings daily, which has been an insurmountable ask for many managers. It would allow the firm to file for ETFs investing in foreign and domestic stocks and bonds. In its filing, American Funds said its first fund would likely “seek to provide long-term growth of capital, with income as a secondary objective.”

Though the SEC intends to green-light the application, opponents of the proposal can still submit a request for a hearing before the commission. Based on past experience, such a hearing is unlikely.

The agency has relaxed its view on active management in ETFs in recent years. Active funds account for just 1% of the ETF market.

In 2012, regulators reversed a 2-year-old moratorium on derivatives use in the funds, a benefit to existing active ETF managers, including Pacific Investment Management Co.

In December, the SEC approved a request to let a new type of security trade that combines facets of mutual funds and ETFs, marketed as “NextShares” by Eaton Vance Corp. Those funds don’t require immediate portfolio holdings disclosure.

Around the same time, the agency denied and publicly rebuked a version of a proposal backed by fund managers, including Capital Group, for nontransparent actively managed ETFs. The SEC said the mechanics of that proposal could destabilize capital markets. The proposal’s sponsor, Precidian Investments, has refiled with regulators.


What do you think?

View comments

Upcoming event

Sep 10


Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Schwab's Jeff Kleintop: Prep for volatility given China trade uncertainties

China could be considered a developed market in five to seven years , according to Jeff Kleintop, chief global investment strategist, Charles Schwab.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

Funding for Reg BI, other SEC advice reform efforts denied in Waters amendment

House likely to approve measure that effectively kills rule package, but it faces uphill battle in Senate

Wall Street lashes out at Sanders' plan to pay off student debt with a securities trading tax

Financial pros argue that a transaction levy will hurt mom-and-pop investors along with investment houses.

GPB paid B-Ds and reps steep commissions to sell troubled private placements

GPB paid commissions of 9.3%, or $167 million altogether, on the firm's private placements.

Give us a break, active managers say

Seven portfolio managers share their outlooks for the rest of the year, generally agreeing that it's been hard for active managers to stand out.

GPB Capital reports decline in value of two biggest funds

One has dropped by 25.4% and the other by 39%, according to the company.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print