By Michael Wursthorn
Asset managers are rushing to launch a new breed of
stock-picking exchange-traded fund, only to find that some of the
biggest brokerages in the U.S. aren't yet willing to pitch them to
clients.
Fidelity Investments, T. Rowe Price Group Inc. and Invesco Ltd.
are among the firms that have recently introduced semitransparent
active ETFs, which combine features of mutual funds and traditional
ETFs. The funds, which currently focus on U.S. stocks, are cheaper
alternatives to mutual funds and give portfolio managers the chance
to try to beat the market without running the risk of being copied
or front-run. But they don't disclose their daily holdings the way
other ETFs do.
The funds have received a chilly reception so far from Bank of
America Corp., UBS Group AG and Wells Fargo & Co., which
haven't yet offered them to their wealth-management clients. Some
bank executives say the strategy requires further scrutiny and a
study of the funds' long-term performance.
That has left the initial wave of fund launches cut off from a
crucial source of support: BofA, UBS and Wells together manage more
than $6 trillion in assets through their wealth-management
divisions.
"It's a process and a lot of work. We just don't want to offer a
lot of new products," said Sandy Bolton, head of managed
investments of Bank of America's investment solutions group, of the
approval process. "In this case, it's in the best interest of
clients."
ETFs are baskets of securities that trade on an exchange, much
like any stock, and have surged in popularity alongside investors'
interest in index investing. The U.S. industry has swelled to more
than 2,000 funds, with over $5 trillion in assets. Investors have
overwhelmingly flocked to the funds at the expense of pricey mutual
funds that try to beat the market.
Some traditional asset managers recognized the benefits of the
ETFs, namely their lower fees, and embraced the opportunity to put
their own spin on the ETF revolution. In 2019, regulators started
approving the first semitransparent products, which shield some of
their holdings from the public's eye for a month or as long as a
quarter, and asset managers began rolling out the ETFs last
year.
American Century Investments was first in March, followed by
Fidelity, T. Rowe Price, Invesco, Natixis and ClearBridge. In all,
the firms launched 19 semitransparent ETFs in 2020, according to
Morningstar Direct. Fidelity and Gabelli Funds launched others this
year, while others, like Goldman Sachs Asset Management, say they
are preparing to bring more to market.
The banks, for their part, aren't entirely bearish on the funds.
Instead, executives say they have spent the past several months
analyzing the added features that accompany the ETFs and expect to
approve some as soon as the second quarter.
One point due-diligence teams have been examining is how well
the funds trade by monitoring spreads between the price to buy and
sell shares. The bigger the spread, the more expensive it is for an
investor to trade that product. Some financial executives initially
worried that spreads would widen due to the limited information on
holdings, making the products unsuitable for their clients.
So far, most of these ETFs appear to be passing the test. Of the
19 ETFs launched last year, about two-thirds had spreads that were
at or below the midpoints for their asset categories, according to
FactSet data measured over a recent 45-day stretch.
"We want to make sure we're thinking about every element we
should be thinking about, make sure advisers understand the
product, the mechanics of it," said Greg Trinks, head of Americas
fund investment solutions at UBS Global Wealth Management.
UBS said it has an eye toward approving some semitransparent
products in the future. Bank of America, meanwhile, expects to take
various semitransparent funds to the bank's product approval
committee sometime in the second quarter, Ms. Bolton said. Both
banks already offer a variety of transparent active ETFs to
clients.
A Wells Fargo spokeswoman declined to comment beyond saying the
firm currently doesn't offer any semitransparent ETFs.
"It's a little like the early days of the ETF industry," said
Anna Paglia, head of Invesco's ETFs and indexed strategies. "You
will have to spend a lot of time and resources educating the market
and ecosystem on what these are and what value they can bring to
investors."
One approach asset managers have taken to ease the approval
process and attract assets has been to roll out ETFs that basically
mimic the strategies of some of their most popular, long-running
mutual-fund offerings. Most of those also feature some or all of
the same portfolio managers.
Fidelity, for example, earlier this month launched an ETF
version of its once widely popular Magellan mutual fund. It also
rolled out ETFs largely similar to its Blue Chip Growth and Value
funds last year. T. Rowe did the same by launching ETF versions of
mutual funds like T. Rowe Growth Stock and T. Rowe Price Equity
Income.
"We chose these...in part because they are well-known flagship
products that would resonate with advisers," said Tim Coyne, head
of exchange-traded funds at T. Rowe.
Whether those offshoots end up cannibalizing their mutual-fund
counterparts remains to be seen. For now, asset managers say ETF
investors represent a new type of client who typically overlooked
mutual funds. Several investor surveys have shown that ETF
investors tend to be younger than mutual-fund investors.
"For Fidelity, ETF users are a new client base," said Greg
Friedman, head of ETF management and strategy at Fidelity.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
February 18, 2021 05:44 ET (10:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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