One of the newer entrants to the exchange traded funds market is trying out active ETFs in what its executives say is a new focus for the business.
BNY Mellon, which launched its first ETFs last spring, filed registration documents with the SEC for four active ETFs in recent weeks, with “likely more to come,” according to David DiPetrillo, head of North American product at BNY Mellon Investment Management.
Active ETFs aren’t new — the first was launched in 2008 by
The approval of the non-transparent structure “has really been the impetus around the recent resurgence of the category,” says Ben Johnson, director of global ETF research for Morningstar.
Even so, active ETFs only represented about 2.9% of ETF market share by the end of January, with $303 billion in assets under management, according to Brown Brothers Harriman’s
BNY Mellon expects that its new funds — three sustainable and one ultra short income ETF — should be approved by the third quarter of this year, according to DiPetrillo, who expects it’s going to be an important part of BNY Mellon’s strategy.
Active ETFs are “a big focus of our product development efforts going forward,” he says.
BNY Mellon introduced its first ETFs in April. Since then, the asset manager has gathered approximately $758 million in client assets across eight passive funds (seven pure index funds and one high-yield beta).
BNY Mellon filed registration documents with the SEC for the BNY Mellon Ultra Short Income ETF — which would incorporate one of the asset manager’s low volatility mutual fund strategies into the ETF wrapper —
All four of the funds will be fully transparent ETFs, according to the firm.
To sell the new ETFs, BNY Mellon is targeting the RIA market, particularly fee-only RIAs that “tend to be larger adopters of ETFs,” according to Andy Provencher, head of North America distribution for BNY Mellon Investment Management.
BNY Mellon has easy access to a major RIA distribution platform due to its ownership of BNY Mellon Pershing, one of the largest custodians in the independent marketplace. Pershing custodies assets for 500 broker-dealers as well as 740 standalone and corporate RIAs, according to the firm.
“Being immediately adjacent to those distribution pipes is an important advantage for those firms,” says Morningstar’s Johnson. He points out that Charles Schwab and Fidelity Investments, though late entrants to the ETF market, benefitted from having a “semi-captive distribution platform” where they have been able to distribute their funds.
To make its ETFs more attractive, BNY Mellon offered a
“It's been fine, relatively speaking,” Provencher says in regards to the traction the eight ETFs being offered at Pershing are now getting. “Most of the success has been elsewhere, but no, Pershing has been a very good partner for us,” he says.
Home to more than $3 trillion, outperformance among the leaders comes with some caveats.
Reporting for ETFs, which trade publicly, is more opaque than mutual funds; asset managers don’t have direct access to see who is investing. BNY Mellon has been working with financial data and corporate services firm Broadridge to better understand where the trades are coming from, Provencher says.
“What we're seeing of late is that the RIA space is gaining momentum [in the overall ETF market],” he says.
If the trend continues, the asset manager will introduce its ETFs to larger broker-dealers, which all have “gating criteria that need to be met before they get onboarded” and may require certain scale, Provencher says.
Morningstar’s Johnson emphasizes that launching any kind of new fund these days is challenging for asset managers.
“Even if you are sitting next to a big distribution pipe, it's not to say that's any guarantee that you're going to succeed,” Johnson says. “It’s a very crowded, intensely competitive marketplace. It's not going to be an easy row to hoe for any relatively late entrants.”
Even with a differentiated offering, “it’s tough — full stop,” Johnson says.
