Last week Putnam Investments released a suite of ETFs focused on mutual funds and investment trusts. ETF Trends was able to speak with Carlo Forcione, Head of Product Strategy at Putnam, about the launch of the firm’s first active ETFs, which included thoughts on how they will leave an impact in the investing world.
ETF Trends: Let’s talk about the different funds – the Putnam Sustainable Leaders ETF (PLDR), the Putnam Sustainable Future ETF (PFUT), the Putnam Focused Large Cap Growth ETF (PGRO), and the Putnam Focused Large Cap Value ETF (PVAL).
Carlo Forcione: It’s always fun to build something new, right? This is the kind of stuff that we get really excited about from a product perspective, developing, innovating, and providing our clients with new tools. The industry has been built on innovation. And if you look at the history of ETFs, we’ve had tremendous growth, obviously, with pure passive strategies since 1993 with SPY.
We’ve had a second organic growth phase with smart beta strategies. In our view, active ETFs, defined broadly, whether traditional active thematic, or ESG, potentially represent the third wave of product innovation for a client’s toolkit. And when you step back and think about, at the end of the day, what these active ETFs accomplish, active ETFs give clients the traditional benefits of the ETF wrapper, which we’re all familiar with, obviously, and an opportunity to access alpha. So those are certainly two key benefits.
Then, when you overlay the semi-transparent aspect of active ETFs, active managers can protect their intellectual property for the first time. Even more critically, the funds can protect that client investment performance experience by avoiding full daily disclosure of all portfolio holdings. So, in terms of the drivers of why we’ve made this decision to get into this space, I’d say there are a couple of reasons.
As we’re all aware, we had that initial proof of concept in 2020. For this new semi-transparent, active ETF product structure, we saw 19 semi-transparent, active ETFs launched last year to raise about a billion dollars. That was a good initial proof of concept that the product structure would work and would be viable in the marketplace.
From a Putnam perspective, this is really about aligning with what our clients are focused on. Efficiency is key for clients, and when we talk about efficiency, I’m mindful of it from a cost and tax efficiency perspective. And that means meeting client where they are and being vehicle agnostic for a firm like Putnam. So, for example, we’ve got significant confidence in our large cap value, large cap growth, sustainable strategies, and being vehicle agnostic means offering these strategies across multiple vehicle wrappers across mutual funds, SMAs, and now ETFs.
ETF Trends: What makes this a good time for these ETFs with a focus on existing mutual funds strategies to be released, as far as how things are trending?
Carlo Forcione: As we think about Putnam, our heritage is active management. That’s our DNA. When we looked at the ETF marketplace, for us, this is really a play to bring our best strategies to market in an ETF wrapper. But as I said, to do that, we really needed that ability to shield our intellectual property and, more critically, to protect that client investment performance experience. When you think about the four strategies that we are bringing to market, these are four active equity capabilities that, on a combined basis, represent over $40 billion in assets. So, we’re not just dipping a toe in the water here. Again, we’re leading with our best strategies and bringing those to market in an ETF wrapper.
ETF Trends: To shift gears a little bit, you mentioned ESG earlier. What sets your ESG apart from other issuers?
Carlo Forcione: We have several ESG strategies that Katherine Collins and Stephanie Dobson manage as co-PMs on these strategies. I would say one major differentiator is Katherine. She is a major thought leader, in our view, within this space, and she’s an accomplished author, speaker on the topic, and really just a wonderful thought leader, advocate, and representative for sustainable investing. So that’s one major differentiator.
A lot of the ESG strategies that we see in the marketplace are systematic or rules-based in their orientation. We think that there’s a lot of value to be provided to clients through a research-intensive, deep fundamental orientation that we bring to bear.
Certainly, as an industry, we saw a pop in client interest in ESG products over the course of 2020. And we have every expectation that will continue going forward for any number of reasons that we’re all familiar with, in terms of folks being more interested in having a values orientation in their approach to investing and in demographic shifts in the marketplace, from women investors and younger investors.
ETF Trends: Why did you opt to go with the Fidelity model over other structures out there? What benefit did the Fidelity model provide?
Carlo Forcione: I would start by saying, look, in three to five years, no one should be talking about the specific active ETF licensing model. As you know, there are a bunch of structures out there across Fidelity, T. Rowe Price, Precidian, Blue Tractor, and the NYSE. All of those structures out there will work; they are all produced by quality shops at the same time.
With all that said, we did find ourselves at Putnam highly aligned with Fidelity for several reasons. In the first instance, both firms obviously have a shared history in Boston; it’s no secret. Both firms have a shared heritage in active management. Fidelity has been working on its active ETF model for over a decade at this point and live testing it for many years as well.
At the end of the day, Fidelity’s value proposition seemed to us to combine pretty nifty, active ETF technology, a strong support model for licenses, and access to Fidelity’s strong distribution platform.
ETF Trends: What are the long-term goals for these funds?
Carlo Forcione: In terms of basic framing here, we think it is the first inning in the active ETF space, and maybe go so far as to say it’s the first half of the first inning in this space. You know, this is a new technology and new product type. We’re always in dialogue with our clients and the marketplace around our best strategies, around our product wrappers, we do see some early pockets of demand. As a positive, it is definitely a priority for us to be relatively early in this space with ETF-specific track records and scale. As an industry, I think we can feel gratified that there are two dozen or so of these semi-transparent active ETFs out there in the marketplace with a billion dollars-plus in assets. This is going to play out over many, many years.
Folks sometimes forget that, when passive ETFs launched in 1993, it really took around 15 years for passive ETFs to get to $500 billion as an industry. So, when you look at the full expanse of the U.S. retail marketplace, there’s around $15 trillion or so in client assets in actively managed strategies.
Adding a new product wrapper to the toolkit seems like a pretty easy argument to us.
Over time, we would say there’s tremendous opportunity in this space, but education will be key. And the key to education, as we’ve already spoken about, is that active ETFs are simply ETFs that folks are already familiar with that offer the potential for alpha. And also offer a means to protect the manager’s intellectual property and protect that client investment performance experience.
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