ETFs are clearly gaining market share from mutual funds, but if you think that the two fund groups are enemies, you should think again.
A new article by Morningstar's Robert Goldsborough highlights the emergence of traditional fund managers entering the ETF industry through partnerships. He writes:
"In early January, State Street rolled out three actively managed style-based equity ETFs in partnership with Massachusetts Financial Services: SPDR MFS Systematic Core Equity ETF (SYE), SPDR MFS Systematic Growth Equity ETF (SYG), and SPDR MFS Systematic Value Equity ETF (SYV). The three funds are subadvised by MFS and use a bottom-up approach to selecting stocks, based on both fundamental and quantitative analysis. Meanwhile, Emerging Global Advisors in early January launched three passively managed emerging-markets bond ETFs subadvised by TCW: EGShares EM Bond Investment Grade Intermediate Term ETF (IEMF), EGShares EM Bond Investment Grade Long Term ETF (LEMF), and EGShares EM Bond Investment Grade Short Term ETF (SEMF). While it's true that the three bond funds-which are Emerging Global's first--track J.P. Morgan indexes, the ETFs also follow sampling strategies, and TCW employs quantitative analysis to pick securities from the funds' respective indexes."
The State Street-MFS and Emerging Global-TCW partnership came just a few short months after the industry's most high-profile pairing. Last year, Fidelity Investments disclosed plans to use U.S. money manager BlackRock as subadviser on 10 new sector-oriented ETFs. Goldsborough continues:
"That rollout was just one piece of an elaborate ETF partnership between the two firms that included boosting the suite of iShares ETFs available through Fidelity's brokerage platform and Fidelity broadening access to the iShares lineup to new audiences."
The bottom line is that pairings between traditional fund managers and ETF issuers will likely accelerate in the future, with such pairings able to help get investment ideas to market faster and play on respective strengths. Existing ETF sponsors have carved out their territory from the industry, and in order to get a piece of the pie, newer providers must decide whether to start from scratch or pair up with an existing and established sponsor. Both sides, however, will want to get paid. Will investors buying a partnership fund pay excessively for it? Traditional mutual fund firms and ETF providers will succeed if they can keep costs down, many in the industry say.
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