It may be the Mutual Fund Store, but company executives are not dogmatic about the "mutual fund" part.
Starting in 2015, the $9.5 billion registered investment adviser known for selling mutual funds and financial advice to the masses will add a product to its repertoire: ETFs.
The company, in Overland Park, Kan., is making the move after years of skeptically watching the rise of exchange-traded funds. It marks another boost for the fastest-growing segment of the money management business.
While the Mutual Fund Store manages portfolios in which clients already have ETFs, this is the first time it will recommend and sell the funds. In the coming months, the company will move what could be hundreds of millions of dollars of client assets into ETFs.
“There's a lot of noise in the market about are you active or passive — we think there's a role for both,” said John Bunch, the Mutual Fund Store's chief executive. “ETF vehicles have reached the mainstream."
The company will use the funds tactically and in concert with actively managed mutual funds. For instance, when it sees the market as unfavorable to active managers — as it was for most of 2014 — or when a certain category doesn't have good managers, it may opt for more ETF exposure, according to executives.
In a category in which ETF alternatives compare favorably with mutual funds, like U.S. large-cap equities, a client's exposure might be 25% to 50%, executives estimated.
The change comes as low-cost online platforms, or robo-advisers, largely rely on ETFs in serving the mass affluent.
Until now, ETF sponsors have focused their sales pitch on institutional investors and financial advisers who serve the wealthy. But all fiduciaries are starting to see the writing on the wall, said Dave Nadig, chief investment officer at ETF.com.
“It starts raising the profile of ETFs among all kinds of investors,” Mr. Nadig said. “In the last year or two, you watch football and see iShares ads. That never used to happen."
The move is also a victory for the
Charles Schwab Corp., the custodian serving Mutual Fund Store clients.
Through its
growing OneSource platform and
in the defined-contribution retirement account space, Schwab is one of the biggest investors in the rise of ETF usage by retail customers.
OneSource allows for commission-free trading of a select set of funds. Schwab, which did not respond to a request for comment, pays the Mutual Fund Store a fee for the assets it directs to OneSource, according to regulatory filings.
Over the past several years, the Mutual Fund Store has begun selling more index funds alongside the actively managed mutual funds that was its core product, according to Mr. Bunch, a former Schwab veteran who was president of retail distribution at TD Ameritrade before he joined the Mutual Fund Store in 2012.
But company founder Adam Bold has been skeptical about ETFs. In articles and on a
radio show that is a source for many clients, company officials have argued that the funds do not always live up to their billing.
Mr. Bold has said that the low cost of the funds is often offset by the cost of trading small batches.
“After carefully researching all possible options, we most often conclude that an ETF tends not to be the best investment option within an asset class,” the Mutual Fund Store website says
. “We are consistently able to find actively managed mutual funds that have outperformed their relevant benchmarks, even when taking fees into consideration."
But after a year in which the company concedes it was tough for active managers seeking to outperform benchmarks (few did), chief investment officer Chris Bouffard said it decided that the Mutual Fund Store had to determine the differences between ETFs that may have value and those that rely on marketing and track fads.
“We've seen this proliferation of ETFs into every corner and niche of the markets,” Mr. Bouffard said. “Some have not been tested."
Furthermore, he said, the company needed time to understand the trading complexities associated with ETFs.
Individual advisers at Mutual Fund Store affiliates and franchises will not be trading ETFs. Instead, trading will be done for all clients at a centralized unit. The company worked with its partners, including the Envestnet Tamarac platform, to bolster its exchange-trading technologies.
The Mutual Fund Store also plans to raise the number of financial plans it creates, from 10,000 this year to 25,000 in 2015.
Though his company is evolving, Mr. Bunch sees no need to change the name.
“I look at this almost like AT&T — it's American Telephone & Telegraph — it's been years since there has been a telegraph in the United States,” he said. “You don't get 80,000 accounts without having brand equity."
