Capital Group, the $2.2 trillion asset manager noted for its American Funds family of mutual funds, continues its aggressive push into exchange-traded funds with yesterday’s regulatory filing for three actively managed, fully transparent ETFs that it expects to launch in the autumn.
The firm was a latecomer to the ETF party when it rolled out its first six ETFs in February 2022, followed by three more in October. In total, these active, transparent products across various equity and fixed-income categories have made a splash by garnering a little more than $8 billion in assets and quickly establishing Capital Group as one of the fastest-growing U.S. providers of active ETFs.
The three new funds in registration with the Securities and Exchange Commission are the Capital Group Core Balanced ETF (CGBL), Capital Group International Equity ETF (CGIE) and Capital Group World Dividend Growers ETF (CGDG).
As stated in the prospectus, the Core Balanced product is built to produce income and capital gains via an investment mix comprising 50%-75% in equities and 25%-50% in debt securities, money market instruments and cash.
The International Equity fund is designed to provide “prudent” growth of capital and conservation of principal by investing in companies with strong balance sheets, dividend payments and the potential for above-average growth in sales, profits and other financial measures.
The World Dividend Growers fund will aim to invest in companies with the potential to provide current yield and dividend growth over the long-term.
The expense ratio for all three funds will be determined later. As is the case with all Capital Group mutual funds and ETFs, the new ETFs will be run by multiple portfolio managers who manage their respective sleeves of the overall portfolio.
Nothing To Hide
While the U.S. ETF industry continues to be dominated by passively managed, index-tracking strategies, actively managed strategies have made gains during the past six years. As of 2017, the majority of active ETFs were bond funds. But equity funds last year overtook bond fund funds to become the largest active fund category, according to ISS Insights.
Much of that has been fueled by numerous traditional mutual fund managers entering the ETF space by offering equity strategies that either mimic or closely resemble their existing mutual funds. The ETFs generally cost less than their mutual fund cousins.
Some asset managers have created ETFs using so-called semi-transparent (sometimes referred to as non-transparent) structures designed to shield actively managed portfolios from daily disclosures as is required of ETFs. Instead, they disclose their holdings on a quarterly basis like mutual funds do (some disclose their holdings more frequently).
By and large, these semi-transparent strategies haven’t caught on with the investing public. “The fully transparent model is easily winning out,” said Morningstar research analyst Daniel Sotiroff.
According to Morningstar Direct, which uses the non-transparent nomenclature, non-transparent active ETFs saw net flows of $875 million in this year’s first quarter versus nearly $24 billion for transparent ETFs.
Sotiroff offered a couple of possible reasons for this. For starters, ETF investors crave simplicity and low fees. As such, they’re not particularly tickled by semi- or non-transparent structures that can seem like a black box that adds complexity and cost to the investing experience.
Active ETFs Led By Four Firms
Another possible reason relates to the sprawling fund distribution networks and fund strategies of certain sponsors.
Sotiroff noted that four firms controlled roughly 72% of the nearly $86.3 billion in inflows to active ETFs in 2022. Dimensional led the way with inflows of $26.4 billion, followed by JPMorgan with $20 billion, Avantis with $10.4 billion and Capital Group with $5.7 billion.
The asset gathering prowess of last year’s top four active ETF fund sponsors has continued in 2023. Statistics from Morningstar Direct show that JPMorgan led the way in this year’s first quarter with net inflows of $7.7 billion into its active funds, followed by Dimensional at $7.3 billion, American Century Investments (mostly attributed to its Avantis Investors unit) at $2.9 billion and Capital Group at $1.7 billion.
Sotiroff said that Dimensional works almost exclusively with RIAs and institutions, giving it a vast built-in distribution network for its ETFs. Plus, he added, their lineup of lower-cost funds strike a chord with investors by offering products that straddle the line between active and passive by providing broad market exposures with certain factor tilts.
Avantis, which is run by former Dimensional executives, also offers factor-based products that have found an audience (though Avantis doesn’t call itself a factor-based shop).
As for Capital Group, Sotiroff said, it’s a big firm with established fund distribution networks. He added that Capital Group’s ETFs and their counterparts in the American Funds mutual fund lineup have similar processes, characteristics and management teams, but they don’t entirely mimic each other.
Regarding JPMorgan, Sotiroff posited that inflows to its active ETF suite are propelled mainly by two products—one fund employs a covered call strategy on the S&P 500 Index; the other is a short-term bond fund.
“It’s the biggest firms with higher-quality strategies that seem to do better in the fully transparent space,” he said.
Capital Group hopes its three funds now in registration will keep it in the active ETF conversation.