Rick Genoni, Global Head of Product Development and Innovation for Allspring Global Investments, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss the benefits of active ETFs and the potential addition of ETFs as a share class to existing mutual funds.
Active ETFs have experienced tremendous growth, and as a result, they now outnumber passive ETFs. While active ETFs now account for approximately 10% of all ETF assets, they have been attracting around 40% of ETF flows. Allspring Global Investments now manages over $1 billion in active ETF assets.
Genoni lists five benefits of active ETFs:
- The potential for positive alpha
- Tax efficiency
- Daily transparency
- The potential for lower costs
- Intraday tradability
There is a proposal before the SEC that would allow an ETF to be added as a share class of a mutual fund, such as Class A, C, or I. This could bring the benefits of the ETF share class to mutual fund clients and bring the scale of the mutual fund business to the ETFs. The proposal includes the potential ability to make a tax-free exchange from a mutual fund to an ETF share class of the same fund. If approved, these tax-free exchanges could accelerate the flow of assets from mutual funds to ETFs.
Genoni sees four benefits for investors moving from mutual funds to ETFs: the scale and efficiencies of the existing mutual fund, mutual funds have long-term track records that allow advisors to analyze each fund’s returns, multiple share classes of a single fund enable optimal rebalancing strategies, and many mutual funds have tax-loss carryforwards that can be used to offset capital gains which can be shared with the ETF share class.
Mutual funds adopting an ETF share class will move from monthly or quarterly to daily transparency. While many of the benefits of the ETF share class will be shared by mutual fund clients, only ETFs will offer intraday tradability.
Advisors and investors will need to decide whether it is better to invest in a stand-alone active ETF or an ETF that is a share class of an actively-managed mutual fund. Some mutual funds may choose not to offer an ETF share class due to capacity issues. While a small-cap mutual fund may close to new investors, an ETF that no longer accepts fund flows is not guaranteed to continue trading at its NAV.
Allspring welcomes conversations with advisors, whether those conversations are specific to Allspring funds or more general questions regarding mutual funds, ETFs, and the potential of new share classes.
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