Mutual fund companies can no longer ignore ETFs

As waves of assets flow out of mutual funds and into exchange-traded funds, that reality is being acknowledged by some of the largest actively managed mutual fund complexes that are embracing ETFs for the first time.

Two of those fund companies explained their respective moves into the ETF space at the Exchange ETF conference in Miami Monday.

“Advisors we speak with increasingly are not comfortable making active management decisions for their clients,” said Holly Framsted, head of ETFs at Capital Group, which entered the ETF space last year and saw $7 billion worth of inflows.

Framsted believes that by offering active strategies in an ETF wrapper, Capital Group is helping advisors offload some of the challenges of actively managing client portfolios.

Framsted’s diplomatic position, as a representative of an American Funds brand that was late to the ETF game, is that there's still a market for mutual funds but that more choices are what advisors want.

“We launched ETFs because our clients were asking for them,” she said. “The ETF pool of investors is growing.”

Part of what's increasing the size of the ETF investor pool is the growing supply of funds and strategies, especially actively managed ETFs.

According to New York Stock Exchange data, 60% of all ETF launches over the past two years were actively managed, 47 new fund managers launched active ETFs last year, and 80% of all active managers had positive inflows last year.

“It’s been a gradual transition for us,” said Tim Coyne, head of ETFs at T. Rowe Price.

“Initially, we launched ETFs to provide strategies to clients in a different vehicle,” Coyne said. “Listening to clients, we wanted to deliver new strategies that fit their needs.”

T. Rowe, which launched its first ETF in 2020, currently has 10 ETFs that combine for nearly $1 billion.

Similar to Capital Group, T. Rowe has a long history in actively managed mutual funds and it isn’t ready to send up the white flag just yet on the mutual fund space.

“It’s a new business for us and there are nuances around ETFs,” Coyne said. “You have to think of it as a strategic mission for the firm.”

Since the first mutual fund was converted into an ETF in March 2021, there have been 35 mutual funds worth $56 billion converted into ETFs, but that won’t be the right move for all mutual funds, Coyne said.

“It’s not as straightforward as many people might think,” he said. “Transitioning a mutual fund into an ETF doesn’t necessarily mean you’re going to have success.”

Capital Group, which hasn’t launched a new mutual fund in about two years, might be enjoying its early success in the ETF space, but Framsted said the company is a long way from shelving the mutual fund model that established the American Funds brand.

“Not every investor wants an ETF; not every investor cares about tax efficiency,” she said. “The ETF isn’t going to be the answer for everyone, and active ETFs still make up a small fraction of the overall ETF market.”

[More: In ‘hell freezes over’ moment, American Funds pairs up with passive ETFs]