Fund industry heavyweights enter the ETF market

Neuberger Berman and some of the world’s largest investors are joining the exchange-traded fund industry for the first time as they seek a foothold in the fast-growing industry, putting pressure on active fund managers to justify their fees.

The U.S. investment firm is one of a group that includes Morgan Stanley, SEI and Matthews Asia – which collectively manage $3 trillion – that recently launched or expressed interest in launching its debut ETFs.

The firms follow other recent heavyweight switchers, such as T Rowe Price, Dimensional Fund Advisors and Federated Hermes, in a rush to launch ETFs as these products rapidly gain market share at the expense of traditional mutual funds.

The launch of such ETFs comes in the context of Fund fees fall, which further suggests that active fund managers are under pressure as investors take advantage of the proliferation of cheaper passive products. As collections of securities that track an index, ETFs are cheaper for managers than old-fashioned, hands-on tools. Such savings are often passed on to the end investor, while being more tax efficient — at least in the US — makes the fund more attractive.

In the U.S., ETF assets rose 185% to $7.2 trillion in the five years to 2021, while mutual fund assets rose 65% to $27 trillion in the same period, according to the Investment Company Institute. Globally, ETF assets have more than tripled since 2015 to $1.01 billion, according to consultancy ETFGI.

Noel Archard, global head of ETFs and Portfolio Solutions at AB, said: “If you talk about meeting with clients, the ETF tool is something we want to offer alongside other products.”

Morgan Stanley, with assets under management of $140 million, is ranked 15th in the Willis Towers Watson ranking. its latest reportis the largest fund provider that does not offer ETFs.

However, an internal memo written by the bank’s head of investment management, Dan Simkowitz, said the bank had made a “strategic decision” to launch a multi-asset ETF platform this year that would provide an active and systematic strategy .

Morgan Stanley shared the memo, which was released in March, but declined to comment on the matter.

Bar chart showing total actively managed ETF assets (billions of dollars)

For AB, the imminent arrival of its first US ETF will be the culmination of a 12-year journey.

It filed to launch a stock ETF in 2010, which was later approved by the SEC, but the funds never came to fruition. While AB has been pushing the buck, Cathie Wood decided to leave in 2014 and set up Ark Invest, which has since launched a suite of ETFs.

However, AB appears to have rekindled earlier enthusiasm for the idea of ​​launching an ETF, filing an application to launch an actively managed ultra-short-term income and tax-conscious short-term ETF earlier this month.

Archard, who was recruited from State Street Global Advisors to lead the push in February, said the “significant event” for AB’s eventual conversion to an ETF was SEC ruling in 2019 This simplifies and speeds up the approval process for ETFs, including actively managed ETFs.

“It lowers one of the barriers to entry for a lot of companies that have been considering ETFs,” Archard said. “Our footprint is mostly active. The rule change has prompted us to re-examine whether we should introduce [active ETFs]. “

Archard said AB’s two initial fixed-income ETFs should be available “late Q3 or early Q4” and that “several equity products” are being planned.

While the rollout is starting in the US, Archard said AB isn’t “restricting” itself to any region. Its initial ETF will have a fully transparent structure, which is crucial in markets such as Europe, where portfolio shielding, translucent and non-transparent structures common in the U.S. have yet to be approved.

Kevin Barr, head of investment management at SEI, said the firm was “looking for something different.” “There’s really no need for more passive ETFs,” he added.

The first fruit of these efforts is the May 18 launch of four actively managed factor-based large-cap U.S. equity funds. Since 2013, the SEI has been running these strategies in separately managed accounts, which are only available to institutions and wealthy individuals. Pricing is 15 basis points comparable.

Although the SEI was initially focused on the U.S. market, Barr said it was “actively considering” the possibility of launching an active ETF in Europe, and the need for full transparency was again not an obstacle. “We’re happy with the transparency. It’s not a passive approach, someone can arbitrage it,” he added.

Neuberger Berman debuted the first three ETFs in April this year. Actively managed thematic equity strategies covering Connected Consumer, Carbon Transition and Infrastructure, and Disrupters ETFs at 55 basis points each.

The New York-based group already manages $18 billion of a total of $460 billion in thematic funds, and its global research strategy chief information officer Hari Ramanan cites “expanding that to ETFs” Tax Efficiency Potential”.

Matthews Asia is also going the transparent active equity route, applying in April for three ETFs focused on emerging markets, Asian innovators and China, which build on its existing mutual funds in these areas.

“While we believe mutual funds will continue to provide benefits to many investors, we are seeing increasing interest from financial intermediaries and end investors looking to take advantage of the benefits offered by active ETFs,” said Matthews Global Head of Asia Jonathan Schuman said. distribute.

Given the relative lack of actively managed Asian or China-focused ETFs, Matthews Asia may have identified a potential gap in the market.

But all ETF latecomers may have to find their niche to gain a foothold in an industry dominated by BlackRock, Vanguard and State Street, which still account for more than three-quarters of the U.S. market.

When asked how SEI’s products challenge the three market leaders, Barr replied: “[We] Can’t see anyone offering these products. These are differentiated products. This is not a ‘me too’ strategy. “

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