Amid this year’s success of actively managed exchange traded funds that don’t disclose holdings on a daily basis, some market observers are forecasting an increase of mutual fund to ETF conversions in 2021.
These new funds represent the best of both worlds’ ideas: the advantages of active management with the liquidity and tradability of ETFs, something that has long eluded the actively managed mutual fund industry.
With more traditional mutual funds eyeing the ETF space but remaining reluctant to give up their secret sauce, many are looking into non-transparent exchange traded products as a way to combine the best of two worlds. Market observers are forecasting growth in 2021 for the new fund structure.
“Moves by two US asset managers to convert some of their mutual funds into exchange traded funds could trigger a wave of copycat manoeuvres by rival houses, industry figures believe,” reports Steve Johnson for the Financial Times.
The movement is already underway. In a sign of the mutual fund times, Fred Alger Management is launching two of its successful actively managed mutual funds in a new exchange traded funds wrapper. The Alger 25 ETF and Alger Mid Cap 40 ETF mark the firm’s entry into the ETF space.
Alger’s decision is another sign venerable active managers to shift to a new ETF model that doesn’t require daily disclosures of portfolio holdings. In October, Fidelity revealed it’s joining the party.
A mainstay in Fidelity Investments’ list of mutual funds, Fidelity Magellan Fund, will see exchange-traded fund (ETF) spin-offs. The fund has been a stellar performer in its heyday, but fees have since swallowed up the fund’s ability to generate a return relative to its ETF peers.
Because it is a type of fund, the ETF is often compared to the mutual fund when weighing the pros and cons of various investment vehicles. Both an ETF and a mutual fund hold a portfolio of investments whether they are stocks, bonds, or other assets.
Furthermore, both fall under the same regulations, depending on the assets that they hold in their portfolios.
The evolution of ETFs that don’t require daily disclosure is making the ETF structure more appealing to active managers, meaning it’s possible mutual fund/ETF conversions will accelerate in 2021.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.