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Mutual Fund to Active ETF Conversions Continues to Pick Up Steam in 2023

Mutual fund to exchange traded fund (ETF) conversions have become increasingly popular. Since Guinness Atkinson launched the first conversion in March 2021, approximately $40 billion in mutual fund assets have moved into ETFs. And many experts believe these dynamics will continue into 2023 as more asset managers join the trend.

Let’s take a look at what’s driving the trend and some recent examples of conversions expected to occur in the new year.

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What’s Driving the Trend?

Many investors and advisors prefer exchange traded funds because of their lower cost, better liquidity and more transparency. Unlike mutual funds, ETFs tend to have significantly lower expense ratios and trade on an exchange, meaning investors can easily buy and sell them. In addition, ETFs can be shorted, optioned or used in hedging strategies.

There’s also a significant improvement in tax efficiency. When a mutual fund sells securities within its portfolio, it may realize capital gains and distribute them to shareholders – even if the shareholders did not sell any fund shares! ETFs use in-kind redemptions to avoid triggering these capital gains taxes, resulting in superior tax efficiency.

The mutual fund conversion process also enables asset managers to keep their existing shareholders through the conversion. As a result, the new ETF starts with a solid asset base and an existing track record. These abilities enable asset managers to jumpstart their presence in the ETF space without starting over from scratch with a new fund.

That said, not all mutual funds are suitable to be converted to ETFs, and not all fund issuers will benefit from converting their funds to ETFs. Most ETFs require daily disclosures of portfolio holdings, which could divulge competitive information (with the exception of non-transparent ETFs). And the conversion could introduce cost and complexity.

Recent Conversions

JPMorgan Asset Management, one of the pioneers of mutual fund to ETF conversions, plans to convert several more funds in 2023 following four successful conversions last year. In aggregate, the asset manager’s U.S. ETF suite has more than 46 products with more than $80 billion in assets under management, making it a top-ten ETF provider.

The four funds set to convert in July 2023 include:

  • JPMorgan High Yield Municipal Fund (JTIAX)
  • JPMorgan Sustainable Municipal Income Fund (OTBAX)
  • JPMorgan Equity Focus Fund (JPFAX)
  • JPMorgan Limited Duration Bond Fund (ONUAX)

Many smaller asset managers are also converting mutual funds into ETFs to increase their assets under management.

After its Harbor Dividend Growth Leaders ETF (GDIV) success, Harbor Capital Advisors plan more mutual fund-to-ETF conversions in 2023, according to a VettaFi. While the asset manager hasn’t provided any details, its Harbor Disruptive Innovation Fund and Harbor Global Leaders Fund offer a unique perspective on market subsets.

Kovitz Investment Group Partners also recently converted two of its existing mutual funds – the Green Owl Intrinsic Value Fund (GOWLX) and the Marathon Value Portfolio (MVPFX) – into a newly launched actively-managed ETF, the Kovitz Core Equity ETF (EQTY). The advisor cited tax efficiency and capital gains deferral as drivers of the transition.

The Bottom Line

Mutual fund to exchange traded fund conversions have become increasingly popular over the past two years. With more than $40 billion in assets converted already, many experts believe these trends will continue in 2023 as asset managers seek out the ETF structure’s benefits and meet the demand for tax-efficient and low-cost products.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.

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Jan 24, 2023