The exchange traded fund industry has been slowly gaining presence in the investment industry, and old mutual funds are finally beginning to jump on the ETF bandwagon lest they get left behind.
“With $2 trillion in assets and investors indicating plans to expand their ETF usage in the intermediate term, we expect additional firms to roll out exchange-based products over the next year,” Todd Rosenbluth, Director of ETF Research at S&P Capital IQ, said in a research note.
Erik Oja, S&P Capital IQ equity analyst covering the asset management sub-industry, pointed out that low-fee passive investments and bonds have been slowly chiseling away market share of more expensive, underperforming actively managed equity funds. In the year ended August 31, the trend has accelerated, with $152 billion pulled out of active U.S. equity funds and $145 billion flowing into passive funds.
“While some of the money has gone into index-based mutual funds, we think investors are increasingly adopting the ETF wrapper that typically provides daily transparency, and tax efficiency,” Rosenbluth added.
Charles Schwab also recently revealed that ETFs are growing on investors. In a recent ETF Investory Study, Charles Schwab discovered that investors already using ETFs are allocating 21% of their investments to ETFs, compared to 16% in 2012. Additionally, the investors expect that number to rise to 25% in the next five years, and one third of respondents believe ETFs will form the core of their investment portfolios.
Here Come Goldman!
Mutual fund companies have noticed the worrying trend and are trying to stem the asset outflows by launching ETFs of their own. For instance, Goldman Sachs and John Hancock are the latest fund companies to join the ETF crowd.
Goldman Sachs Management, which has 200 equity mutual fund share classes with $43 billion in AUM, launched two multi-factor ETFs and have more smart-beta ETFs strategies lined up. The fund provider recently launched the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSEArca: GSLC) and Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEArca: GEM), which promise to be among the cheapest smart-beta ETF offerings in their respective categories. [A Cheap, Smart-Beta ETF to Track Emerging Markets]
The rapid growth of the new Goldman Sachs ETFs suggests that there is high demand for the Goldman Sachs brand and their strategies. GSLC has already accumulated $64.4 million in assets under management. Additionally, GEM has attracted $178.2 million in AUM. The two Goldman Sachs ETFs have hit the ground running, bringing in some large institutional investors. Just yesterday, a large institutional client committed $150 million, according to a Goldman Sachs executive.
Goldman Sachs has already filed for four other smart-beta index ETFs, which are expected to come out later.
Along with the Goldman Sachs expansion, John Hancock also made its ETF debut with six smart-beta ETF options last week, launching the John Hancock Multifactor Large Cap ETF (NYSEArca: JHML), John Hancock Multifactor Mid Cap ETF (NYSEArca: JHMM), John Hancock Multifactor Consumer Discretionary ETF (NYSEArca: JHMC), John Hancock Multifactor Financials ETF (NYSEArca: JHMF), John Hancock Multifactor Healthcare ETF (NYSEArca: JHMH) and John Hancock Multifactor Technology ETF (NYSEArca: JHMT). The ETFs are based on Dimensional Fund Advisors strategies. [John Hancock Makes ETF Debut]
The two fund companies join other mutual fund providers who have turned to the ETF industry, including DoubleLine, Calamos, JPMorgan and PIMCO.
Many other mutual fund companies, though, are seeking a partnership with Eaton Vance’s NextShares exchange traded managed funds, including American Beacon, Principal Financial Group, Gabelli Funds, Ivy Funds and Pioneer Investments, among others. Fund managers view ETMFs as a better way to safeguard their investment strategies against front runners since the ETMF structure allows for less transparent disclosures, as opposed to ETF’s daily disclosures. [How Transparency Plays a Role in ETF Structure]
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.