Mutual funds are under immense pressure, now, more than ever. Capital outflows have increased significantly amid concerns of disappointing performance and high management fees. Investors are increasingly turning to Exchange Traded Funds. The result has been a spike in the number of Mutual Funds converting into Exchange Traded Funds.
Mutual Fund – ETF Conversion
While the first mutual-ETF conversion is yet to happen, activities behind the scene are gathering pace. Guinness Atkinson Funds has already confirmed plans to convert the Alternative Energy Fund into an exchange-traded fund. The conversion is in response to changing investors’ sentiments about mutual funds.
If all goes well, SmartETFs Sustainable Energy will become the first ETF with roots from a mutual fund. Guinness Atkinson has already made a filling with the Securities and Exchange Commission to seal the conversion.
Guinness Atkinson Funds has already made the other two applications seeking convert mutual funds into ETFs. SmartETFs Dividend Builder and SmartETFs Asia Pacific Dividend Builder are the other ETFs transitioning from mutual funds.
While the three funds represent a tiny fraction of the industry standards, the conversion is likely to have a ripple effect in the broader mutual fund space. Mutual fund managers are becoming increasingly concerned, given the rate at which money is increasingly flowing out of mutual funds into ETFs.
Index tracking mutual funds that have so far remained resilient amidst underperformance in the broader segment have also come under pressure. The funds have already started seeing an outflow of capital, losing by the most extensive margins to ETFs.
Vanguard Mutual Conversion
Guinness Atkinson conversion is already having a ripple effect with similar moves experienced in other segments of the market. Vanguard Group has already converted some of its lower cost ETFs in response to strong investor demands about ETFs.
However, for Vanguard, the conversions are mostly structured as a share class within the mutual fund space. The firm has also confirmed plans to convert some of its mutual fund’s holdings into lower-cost ETF shares for clients under its advisory business.
The conversions continue to elicit mixed reactions with Morningstar’s Director of Global ETF Research, Ben Johnson reiterating that the inflows experienced in Vanguard have no effect on overall assets. This is because the conversion amounts to taking money out of one pocket and putting it in another.
Mutual funds have lost favor with investors, given the aggressive investing strategies deployed by money managers. In recent years, they have performed dismally with performance hitting lows at the peak of the COVID-19 triggered market crash in March.
In the first months of the year to May, more than $20 billion was pulled out of mutual funds, with most of the money ending up in ETFs. Exchange-Traded Funds are becoming the investment wrapper choice of most investors, given their low management fees and better returns than mutual funds.