Capital Group, the $2.6 trillion mutual fund giant, is bucking the recent trend among fund companies migrating into the ETF space by going fully transparent with its suite of six actively managed strategies.
The asset manager is also sending a message by registering the new funds under the Capital Group name as opposed to the better-known American Funds brand that adorns its mutual fund business.
Capital Group said Tuesday the new ETFs, covering strategies ranging from value to growth, will be fully transparent, meaning that their holdings will be made public each day. The funds are expected to launch by the end of March 2022.
The news was a surprise to some ETF insiders who expected Capital Group to follow a pattern that first showed up in early 2020 when a number of mutual fund complexes started launching so-called semitransparent ETFs, that trade throughout the day like stocks, but tap into an exemption that allows to only show the portfolio holdings on a monthly basis like mutual funds.
“Some of the established firms that launched active equity ETFs in the past 18 months did so using a structure that delayed the disclosure of fund management’s investment decisions through a semi-transparent structure, including American Century Focused Dynamic Growth ETF (FDG) and Fidelity Magellan ETF (FMAG),” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.
Holly Framsted, Capital Group’s head of ETFs, said one of the reasons they opted for fully transparent is that the semitransparent model is currently limited to domestic equity ETFs, which only applies to three of the new ETF filings.
In addition to domestic equity, two strategies will invest in global equities, and one will invest in fixed income.
The new funds from Capital Group include: Core Plus Income ETF (CGCP), Growth ETF (CGGR), Core Equity ETF (CGUS), Dividend Value ETF (CGDV), International Focus Equity ETF (CGXU), and Global Growth Equity ETF (CGGO).
In terms of launching under the Capital Group brand, as opposed to the American Funds brand that has become popular with financial advisers, American Funds chairman and chief executive Matt O’Connor said that decision was based on a longer-term strategy of building out the Capital Group brand on a global scale.
He described the American Funds brand as an “important asset to the organization” which “we will continue to support.”
“The Capital Group organization goes broader than the American Funds offering,” he added. “We believe ETFs give us a nice avenue” to continue developing the global brand.
It is also worth noting the ETF industry leader BlackRock markets its ETFs under the iShares brand.
‘ALL THE INGREDIENTS’
In terms of what took the 90-year-old asset manager so long to enter the ETF space, Capital Group chairman and chief executive Tim Armour said the “most significant event” was recent regulatory changes related to ETFs.
“We’ve been on this for a long time and we wanted to get it right, and today we believe we have all the ingredients” to successfully enter the ETF market, he explained.
Noticeably missing from the SEC filing are any details on the fees the new funds will charge, but Armour insisted, “our ETFs will be low cost,” without offering specifics.
“This is a transformative event,” he added. “The industry is in very early stages of active ETFs. We will define the role of active ETFs in a client’s portfolio.”
Citing the almost 200,000 financial advisers in the U.S. that currently access American Funds products, Armour said, “We see no reason our ETFs can’t be a $500 billion business in the future.”
The appeal of the fast-growing $6.6 trillion ETF business is obvious to ETF watchers like Rosenbluth.
“Actively managed ETFs represent just 2% of equity ETF assets and 4% of overall assets, but these equity ETFs gathered 9% of the flows year to date as of mid-August,” he said. “Capital Group is currently one of few top-tier active managers to not offer an index-based or active ETF alternative as investors have increasingly shifted away from just owning active mutual funds. We think Capital Group’s efforts could help validate all actively managed ETFs in an industry where many people think of them as just passively replicating the S&P 500 Index.”
WHAT’S IN AN ETF?
After years of sticking with mutual funds, Capital Group’s move shows that investor appetite for the product is becoming too hard to ignore. With Ark Investment Management’s Cathie Wood proving that transparent, active management can succeed in the ETF industry, mutual fund managers such as Dimensional Fund Advisors and Federate Investors are also debuting new products to capitalize on the torrent of cash flowing into ETFs.
“Maybe they thought the ETF thing would fade away or reach a peak, but this year has shown it might be early innings,” said Bloomberg Intelligence ETF analyst Eric Balchunas. “The past couple years of flows have turned even the most hesitant firms into believers. Clearly ETFs are really desired right now.”
ETFs have taken in about $557 billion so far in 2021 — already their best year on record — while mutual funds have added just $74 billion, mostly in bond funds, according to data compiled by Bloomberg. Equity mutual funds have lost about $258 billion. Last year, ETFs attracted about $500 billion, while mutual funds lost about that much.
This year, U.S. money managers have successfully converted mutual funds to ETFs for the first time, with the likes of JPMorgan Chase & Co. planning to shift more assets to the newer product. But Capital Group will create the ETFs from scratch and plans to offer them alongside other products, such as its American Fund family of more than 40 mutual funds. For instance, the Growth Fund of America (AGTHX) has about $280 billion in assets and has risen more than 25% in the past year.
While there’s a process for firms to launch products that hide their holdings in an ETF wrapper, known as active nontransparent ETFs, Capital Group opted for the fully transparent variety. Nontransparent funds, including those from firms like American Century and T. Rowe Price Group, have struggled since they debuted last year. The category’s largest offering, from Fidelity Investments, holds less than $500 million of assets.
“It displays confidence,” Balchunas said. “ETF investors especially like to see what’s in an ETF. They’ve become used to it.”
— Bloomberg News contributed to this report.
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