Arguably, the active ETF market continues to be one of the fastest-growing segments of investment management and more funds continue to launch on a daily basis. While many of those launches are coming from smaller, boutique players, increasingly the bigger companies in investment management are getting into the act. And you can’t get any bigger than Capital Group.
Investors might not be familiar with Capital Group itself; they should be familiar, however, with its chief brand name, American Funds. American Funds has long been a staple of the defined contribution/401k world and some of its mutual funds are the largest on the planet. As mutual fund demand wanes, Capital Group is following some of its rivals and changing its ways.
That is, launching a series of active ETFs.
There’s no doubt that Capital Group is late to the ETF party. The question is whether it is too late and if it and other rivals have a real shot at ETF gold.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
A Big Mutual Fund Player Steps In
Founded in the 1930s, Capital Group is one of the oldest investment managers still in existence. Part of its appeal has long been its conservatism and focus on active management. There are zero index funds in its American Funds lineup. Moreover, it doesn’t offer sector-focused funds or niche/thematic’ investment vehicles. This, combined with its committee approach to fund management, has made it a leader in many retirement plans and 401ks. As such, the firm features over $2.6 trillion under management.
However, its leadership position has been slipping in recent years. At one time, several of its American Funds mutual funds could be found among the 25 largest mutual funds overall. These days, that list is dominated by index players—like Vanguard and BlackRock —with the American Funds Growth Fund of America (AGTHX) being the sole holdout.
Like many old-school fund managers, Capital Group has seen the writing on the wall and acted accordingly.
With that, the firm has now brought its first ETFs to the table. The suite of six ETFs covers a range of asset classes and styles—with one ETF focusing on fixed income—while the others will cover both U.S. and international stocks. The six ETFs— Capital Group Growth ETF (CGGR), Capital Group Core Equity ETF (CGUS), Capital Group Dividend Value ETF (CGDV), Capital Group International Focus Equity ETF (CGXU), Capital Group Global Growth Equity ETF (CGGO), and Capital Group Core Plus Income ETF (CGCP) —will be fully transparent and update their holdings daily. Additionally, the funds will still follow Capital Groups’ communities-style investing process.
Expense ratios for the new active ETFs range from 0.33% to 0.54%.
A Potentially Small Splash
The problem for Capital Group/American Funds is that their efforts might not work out as hoped. Like many traditional fund managers, the move to ETFs has been an ‘after the fact’ action. It’s only after assets have started to bleed and investor interest has waned that they have moved into the space. That makes it much harder to gather assets and see your funds pull traction.
Secondly, and more specifically, Capital Group might have gone the wrong route when creating its funds in the first place. It created brand new funds, with new strategies, rather than building on any of its strengths.
Given its size and well-known name, it could have followed Dimensional Fund Advisors’ recent moves by going for mutual fund-to-ETF conversions. This sort of transaction instantly unlocks the benefits of ETFs, while keeping your long-term investors in your fund. In the case of DFA, it instantly made them the largest active ETF manager on the planet. Heck, Capital Group didn’t use its branding “American Funds” on the ETFs.
Additionally, designing mutual fund clones with the same managers and mandates—like what T. Rowe Price has done—could have been the correct move. Here, investors can choose the best vehicle for their needs; we’ve seen these mutual fund clone ETFs gather assets quite quickly. We’ve seen the traction and advantages that these types of moves can have when growing an ETF brand.
All in all, the moves serve as an interesting litmus test for the rest of the fund industry.
The question is whether or not a giant like Capital Group can make in a cutthroat industry on its merits alone. Like many providers, the firm is behind in the ETF race—about 30 years behind. If it’s able to gather assets and traction with investors, then other smaller and mid-sized asset managers might have a chance to compete against the BlackRocks of the world. If it fails, they now have a lesson of what not to do. It’ll behoove them to create clones or simply convert their existing mutual funds to ETFs.
Don’t forget to explore our Dividend Guide where you can access all the relevant content and tools available on Dividend.com based on your unique requirements.
The Bottom Line
Either way, Capital Group’s entry into the world of active ETFs places a spotlight on the fund type. No longer can managers—even big holdouts—ignore the power of ETFs. They have to do something. And they need to do it soon. It will be interesting to see if Capital Group’s chosen path is the correct way to enter the market.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.