Resistance Is Futile
They held out for almost three decades, but the new rules persuaded some reluctant money managers on Wall Street to finally embrace ETFs.
T. Rowe Price and BNY Mellon both entered the market for the first time earlier this year, while Wells Fargo, Federated Investors and Dimensional Fund Advisors may launch their first ETFs in the near future, according to company statements.
“This rule has encouraged traditional mutual fund firms,” Zhang said. “They can come in without going through the lengthy process, and they can offer their active content under an ETF structure.”
According to data compiled by Purview Investments, 15 new ETF issuers and 20 new ETF brands have launched since the new regulations were approved and announced in September 2019.
Meanwhile, the first mutual-to-ETF conversion is currently underway, with Guinness Atkinson Funds seeking to transform three of its offerings. At the same time, Vanguard Group has been converting some holdings to its lower-cost ETFs, structured as a share class within the mutual fund business.
Creative Thinking
The pandemic has altered consumer behavior, with social views shifting on things like environmental, social and governance issues. The rules have allowed the ETF industry to react quickly.
So far this year, 17 ETFs focused on ESG have launched, including from powerhouses BlackRock Inc. and Vanguard Group. There’s also been a boom in products designed to take advantage of the virus-driven tech rally. For example, both Direxion and BlackRock released “work-from-home” funds featuring stocks like Zoom Video Communications Inc. and Oracle Corp.
“Since March, there has been more interest in thematic products,” said David Perlman, an ETF strategist at UBS Global Wealth Management, especially ones “identifying beneficiaries from Covid.”
At the same time, the industry itself has been maturing, and that’s meant issuers pushing into less obvious parts of the market.
Among recent innovations are the first fund tracking collateralized loan obligations, a blank-check ETF and a product that combines the gains of the S&P 500, Nasdaq 100 and Russell 2000 indexes.
New Worries
Still, some warn that the ETF rule may present new problems.
By making it easier to launch a fund, the regulations might have inadvertently increased challenges for small issuers or those without name recognition which were already in a fight for distribution and assets.
“It’s only ratcheted up the competition because now the barriers are lower, and you have this influx of products,” said Jillian DelSignore, principal at Lakefront Advisory.
The changes also permit the use of what’s known as custom baskets, which allow greater flexibility for authorized participants on what assets are added to or removed from a fund. Yet the related disclosure requirements were more relaxed than many in the industry expected -- raising the prospect an ETF may not track its underlying securities in the way an investor expects.
“While ETFs’ sponsors must publish written policies regarding basket construction and maintain information on each basket they trade,” said Ben Johnson, Morningstar’s global director of ETF research, “they do not have to disclose the makeup of those baskets to the public.”
This article was provided by Bloomberg News.