Envestnet Inc. has launched four exchange-traded funds that are open to all investors but are primarily aimed at financial advisors who use the firm’s wealth management platform.

The funds, which began trading last week, will play a big role in Envestnet | PMC's ActivePassive multi-asset model portfolios available on Envestnet’s platform. Envestnet | PMC is Envestnet’s portfolio consulting group that both selects asset managers available on the platform and builds its own investment models and portfolios. 

The new ETFs are based on Envestnet | PMC research that posits the combination of traditional active management, systematic factor-based investing and passive index exposure captures the best traits of both active and passive investing while limiting their shortcomings. 

The product suite comprises the ActivePassive U.S. Equity ETF (APUE), ActivePassive International Equity ETF (APIE), ActivePassive Core Bond ETF (APCB), and ActivePassive Intermediate Municipal Bond ETF (APMU). 

All four funds employ passive and strategic beta exposures that are managed by Envestnet | PMC's Quantitative Research Group. The active exposures are managed by third-party subadvisors. 

Strategic beta attempts to improve the risk or return characteristics of traditional market-cap-weighted indexes by tilting toward one or more “factors”—the attributes of an asset that both explain and produce its excess returns. These factors include quality, momentum, value, size, dividends and volatility, among others.

Factor-based investing traditionally has been used for equities, but increasingly is being incorporated into the fixed-income sphere.

The U.S. Equity ETF, for example, targets the CRSP U.S. Total Market Index. It will typically utilize active management for smaller-cap companies and use passive management for larger companies within the index. Active management could account for 15% to 65% of the fund’s portfolio depending on changes in the market environment. And part of that active component includes the use of strategic beta.

“We view factor management as active; it’s just a more systematic, rules-based active,” said Brooks Friederich, principal director of research strategy at Envestnet | PMC. “It’s active because you’re taking an active tilt away from market-cap weights.”

The new ETFs charge fees ranging from 0.33% to 0.45%.

Swapping Funds
According to Envestnet | PMC, more than 2,500 financial advisors had invested in its ActivePassive model portfolios as of year-end 2022, with total assets under management of $3.7 billion. These are risk-based portfolios ranging from conservative to aggressive growth. 

Two of the products used in these portfolios are actively managed Envestnet mutual funds—one focuses on global equity; the other provides core bond exposure. The goal is to shift money out of those mutual funds and into the new ETFs.

“We’re not converting the mutual funds to ETFs like Dimensional did with some of their funds,” Friederich said. “We’re selling out of the traditional mutual fund models and moving those assets into the lower-cost ETF model.

“We’re not just doing this in the dark,” he added, noting that Envestnet is working with RIAs and broker-dealer firms that are Envestnet clients to get the proper sign-offs.

The Envestnet | PMC ETFs aren’t the only products available in the ActivePassive model portfolios, but eventually they will comprise a sizable chunk of the allocations. Friederich noted that together the four funds represent the building blocks of a 60/40 balanced portfolio.

And by rolling out its own ETFs, Friederich said, Envestnet joins the industry trend of asset managers using their own proprietary products within model portfolios. Envestnet and others don’t charge a management fee for those portfolios. Instead, they benefit from the underlying expense ratios of the funds within the model portfolios.

The Envestnet | PMC funds have been live for just a week, but already the ActivePassive International Equity ETF has nearly $67 million in assets and the ActivePassive Intermediate Municipal Bond ETF has $29 million in assets, according to Morningstar.

The reason, Friederich explained, is that some firms and enterprises who work with Envestnet have converted their traditional mutual fund model portfolios into lower-cost ETF versions. 

“It’s a 10- to 15-point cheaper version of the model portfolio solution,” he said.