1. Has this happened yet?
Yes. A small mutual fund provider called Guinness Atkinson Asset Management became the first, when it converted two of its mutual funds into the SmartETFs Dividend Builder (DIVS) and SmartETFs Asia Pacific Dividend Builder (ADIV) in late March. That was a milestone moment for the $5.9 trillion ETF industry and is expected to pave the path for more conversions in the future.
2. What’s the difference between a mutual fund and an ETF?
In both mutual funds and ETFs, investors are effectively pooling cash to buy assets by buying shares in the fund. However, mutual funds can only be purchased at the end of each trading day, while ETFs can be bought and sold intraday. Mutual funds tend to have higher minimum investment requirements and often charge higher fees. For most investors, ETFs are more tax efficient, as their structure allows them to minimize capital gains. Although both come in actively-managed and passive forms, the majority of ETFs track indexes, while mutual funds are more commonly actively run by an investment manager.
3. What’s the incentive to convert?
The conversion to an ETF wrapper could bring new attention to mutual funds that have been struggling to gain inflows. The trend in recent years has been for much more cash to flow toward ETFs, which tend to be cheaper and are easier to trade. Almost $500 billion flowed into the U.S. ETF industry in 2020, while mutual funds lost about $362 billion. Meanwhile, a fund manager may also be looking to bring the benefits of an ETF to its investors or could be actively responding to client demand.
4. Is there any precedent for this?
Yes, sort of. Vanguard Group, one of the biggest ETF issuers and asset managers in the world, has been switching assets from its mutual funds to lower cost ETFs. However, at Vanguard these ETFs are structured as a share class within the mutual-fund business, meaning they don’t quite qualify as a formal conversion in most eyes.
5. Who else is thinking about this?
The biggest player to watch next is quant giant Dimensional Fund Advisors, which is scheduled to convert more than $20 billion worth of mutual funds into ETFs beginning in June. The Austin, Texas-based firm manages about $601 billion in assets, and its planned conversions will instantly make it one of the 12 largest ETF issuers in the U.S. Meanwhile, Guinness Atkinson is already planning to switch a third product– its Alternative Energy Fund — into the SmartETFs Sustainable Energy ETF, while Adaptive Investments and Foothill Capital Management are among those pursuing their own conversions.
6. Can all mutual funds do this?
No. Some mutual funds have multiple share classes and are distributed across a variety of platforms, making such a conversion difficult. Others have a large portion of their ownership in retirement programs that aren’t capable of accommodating the ETF wrapper.
7. Is this good news for actively managed funds?
In ETFs at least, there’s reason to think so. Actively managed ETFs have gained popularity lately, since they combine the advantages of the ETF wrapper with the stockpicking expertise of a fund manager. These products only make up about 4% of the total ETF market but they’re growing rapidly, taking in about $55 billion in 2020 for their best year on record. Ark Investment Management’s Cathie Wood brought attention to the category with her slate of actively managed funds that were among the best performing U.S. ETFs in 2020.
• A Bloomberg News article marking the first conversion.
• A QuickTake on actively-managed ETFs.
• An explainer on the next big manager to convert funds.
• A look at a tiny pot mutual fund seeking to become an ETF.