Money managers like Jeffrey Gundlach scramble to jump into ETFs

Jeffrey Gundlach is no stranger to striking out on his own or launching new products. After an acrimonious split with the TCW Group Inc. in 2009, he did just that, building what has become a $63 billion business with 12 mutual funds.

But when it came to starting an exchange-traded fund, his Los Angeles-based firm, DoubleLine Capital, needed some convincing, according to David LaValle, head of ETF capital markets in the U.S. at State Street Corp.’s money management unit.

“Why would they want to be in this space when [they] have a successful franchise,” said Mr. LaValle, speaking at an industry conference in New York on April 1. Ultimately, though, ETFs access “a totally different investor base” than mutual funds, Mr. LaValle said.

Mr. Gundlach has said he remains ambivalent about just how popular ETFs will become. But, on the sidelines of a massive ETF industry conference he keynoted in Hollywood, Fla., in January, he said he wasn’t going to take any chances. “I want to be involved, certainly, and not left behind,” he told a reporter.

In little more than a month since the launch of his first actively managed ETF, in partnership with State Street, the SPDR DoubleLine Total Return Tactical ETF (TOTL) has become one of the largest ETFs of its kind. At $240 million, TOTL’s assets are still a pittance compared with the $117 billion in the world’s largest bond mutual fund, Pimco Total Return (PTTAX).

Source: Morningstar Inc.

But the launch is just one in a quickening pace of moves by once-reluctant and still-reticent money managers to capture the business of advisers flocking to the $2 trillion — and fast growing — ETF industry.

Myriad Examples

Among the myriad examples, Goldman Sachs has said in regulatory filings that it plans about a dozen funds to kick-start its ETF business. Meanwhile, Eaton Vance Corp. is encouraging money managers to adopt its new structure, called exchange-traded managed funds, or ETMFs, which combine elements of ETFs and mutual funds.

Other firms are looking outside for help in building their ETF businesses. Legg Mason Inc. in February hired away two top executives from The Vanguard Group Inc. for its own push. In December, the New York Life Insurance Co. agreed to buy a smaller ETF manager, IndexIQ, to propel its ambitions.

“Getting those investors without as big a tax hit would be a big victory for us.”— Jacob Wolkowitz,  investment manager at Accredited Investors Inc.

JPMorgan Chase & Co., one of the leading sellers of actively managed mutual funds, launched a set of three “smart” beta ETFs over the past year. That product category promises the magic of active management in a cheaper, rules-based format.

These plans stand to give advisers a wave of new, possibly cheaper, ways to access the investment managers they already use. And it may give those fund managers easier access to cost-conscious, fee-based financial advisers.

Jacob Wolkowitz, an investment manager at Accredited Investors Inc., said it’s unfortunate that the boutique money managers he favors — such as Artisan Partners, First Eagle Investment Management and Oakmark — aren’t available through ETFs. He said ETFs are generally more tax efficient.

“It’s a loss,” said Mr. Wolkowitz, who is based in Edina, Minn., where the combined state-and-federal tax burden is high. “Getting those investors without as big a tax hit would be a big victory for us.”

Just nine, or a third, of the top 25 U.S. mutual fund companies have ETF lineups under their brand name. Another third, eight firms, have filed for or received approval to start an ETF program. The remaining third are on the sidelines.

The brands without a clear ETF strategy represent trillions of dollars in adviser-sold investment products. Those firms include American Funds, T. Rowe Price and Dimensional Fund Advisors. American Funds owner Capital Group Cos., which is based in Los Angeles, won approval to launch ETFs last month but hasn’t detailed its plans.

The Securities and Exchange Commission, which regulates ETFs, has also granted the makers of Janus, Principal Funds and John Hancock products approval to start the planning process. Other fund managers — including Wells Fargo Advantage, Prudential Investments and Nuveen Investments — have filed for similar status.

Alternate Path?

Yet it remains unclear whether those firms will look to develop the ETFs or follow the alternate path of T. Rowe. The Baltimore-based money manager hasn’t yet exercised the rights it won in a similar approval from the SEC back in 2013. (T. Rowe Price officials declined to comment.)

One of the reasons may be transparency. Unlike mutual funds, actively managed ETFs have been required to disclose their holdings on a regular basis. That disclosure allows ETFs to trade at prices roughly in line with the value of those underlying assets. But firms that haven’t joined the market have expressed caution, publicly, over the potential for their investment strategies to be revealed to the general public and taken advantage of by traders.

Privately, those firms wonder if the low fees and index-tracking orientation of many of the funds will “cannibalize” their existing, and in many cases profitable, businesses. While traditional fund companies have faced outflows and pressure on the fees they can command, they’re still thriving financially. Publicly traded money managers grew their revenue by 13% last year and returned profits of 33%, a five-year high, according to Casey Quirk & Associates, a consulting firm.

“The market has always recognized that ETFs are a disruptive technology. ”— Brian Reilly,  Vice President, Brown Brothers Harriman

Brian Reilly, who advises asset managers on their ETF strategy at Brown Brothers Harriman, said many of those money managers have dedicated teams that meet regularly to craft a strategy. If it takes a while, that’s because the decisions raise fundamental questions. Among them: How will fund managers and distributors, such as broker-dealers, share revenue?

“The market has always recognized that ETFs are a disruptive technology,” Mr. Reilly said. “That has forced discussion [for asset managers] about who we are and where do we go as a firm.”

Still another problem is the possibility that the demand just isn’t there. Actively managed ETFs remain just 1% of the U.S. market for ETFs. And some advisers see little value to be added.

Actively managed ETFs may improve tax consequences for investors, but they don’t necessarily dramatically improve an investor’s chances of success, according to Will Braman, chief investment officer at Ballentine Partners, which is based in Waltham, Mass. He favors index-based ETFs as well as private investments over many mutual funds and actively managed ETFs.

“You’re still left with the problem of high fees, and whether managers can generate sufficient alpha,” he said.