American Funds' Parent Finally Gets Into ETFs But Is It Too Late?

Mutual fund companies entering the ETF industry have a very mixed track record of success.
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The first investment fund I ever owned was the American Funds' Washington Mutual Investors Fund (AWSHX). My parents bought it for me in a UGMA account when I was a kid and seeded it with several hundred dollars to give me my "official" start into investing.

For the broker who recommended it, the American Funds were a dream. Many had solid track records of performance, so they could easily sell that they were doing right by their clients. The real appeal for brokers, however, was that fat 5.75% front load, so the fees they could collect upon selling were high.

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We simply called it The Washington Fund and it remained the only fund I owned up until college when I got old enough to trade on my own and became more knowledgeable in the other opportunities that the financial markets had to offer.

Capital Group is and has been a mutual fund behemoth. It's still the 3rd largest mutual fund manager in the world with more than $2 trillion in assets under management. This has happened even as actively-managed mutual funds, which American Funds specialize in, have fallen out of favor with where the fund industry as a whole has headed.

That's finally about to change. The last major mutual fund holdout is about to enter the ETF business.

Capital Group announced on Tuesday that it plans on launching on six actively-managed ETFs, all looking like they will have a core holding theme, by the end of the first quarter of 2022. The company plans on launching one fixed income and five equity ETFs.

All of the ETFs plan on being fully transparent, which is the model that Cathie Wood's ARK ETFs use - actively-managed but posting their holdings on a daily basis. The structure of these funds is certainly intriguing. The company certainly has the size and muscle to make a dent in the ETF space, but....

Is It Too Late For Capital Group?

It's easy to argue that the time for making this decision was a few years ago. Much of the growth in the ETF industry has happened over this time and while there's certainly the potential that the industry will continue growing at a rapid pace for at least several more years, all of the major providers - Vanguard, BlackRock, State Street, Schwab, Invesco - already have a huge head start.

The track record of late entrants to the ETF space is pretty spotty. The biggest success story, of course, is ARK, which went from about $3 billion in total assets at the beginning of 2020 to roughly $60 billion at its peak in 2021. That number has since shrunk to about $43 billion, but even at that level, ARK is still the 11th largest ETF provider today.

It's a crowded space and Capital Group has a few factors working against it.

  • Active Management - Even though some actively-managed themes have broken through in recent times - ARK's disruptive innovation, blockchain, cannabis - this industry still belongs to the ultra-low cost passively-managed funds. If you look at the list of the largest actively-managed equity ETFs, the top six spots all belong to either ARK or Dimensional. ARK, of course, is unique, but Dimensional brought all of its ETF assets over from the fund side. They weren't grown organically. The next best fund on the list is the iShares MSCI All Country Asia ex-Japan ETF (AAXJ) with $5 billion in assets. Is that the ceiling for the Capital Group ETFs? I think it might be.
  • Too Generic - Recent history has shown that the active funds that have had the greatest degree of success are what some refer to as "shiny objects", funds which get attention for being unique or niche. The Capital Group ETFs don't look terribly eye-catching.
  • Cost - In order for new ETFs to attract flows, they have generally had to fall into either the "shiny object" category or come in with an ultra-low expense ratio. We don't know yet what these funds are going to charge, but if it's revealed that they're going to have expense ratios of around 40-50 basis points, I really think they could end up being duds.

Comparisons To Mutual Fund Companies That Launched ETFs

Other mutual fund heavyweights have already made the leap over to the ETF space with mixed success. Let's take a look at each of the major converters one by one.

Fidelity

Fidelity isn't exactly new to ETFs, but they've certainly tried to accelerate their presence over the past few years. The Fidelity Nasdaq Composite Index ETF (ONEQ) has been around since 2003, but it was the company's lone ETF up until 2013, when it launched its lineup of sector ETFs. Factor ETFs came in 2016 with occasional new fund launches getting sprinkled in through 2019.

2020 and 2021 was when the company started launching ETF versions of its most popular mutual funds. The Fidelity Blue Chip Growth ETF (FBCG) and the Fidelity New Millenium ETF (FMIL) arrived during the summer of 2020, while the Fidelity Magellan ETF (FMAG) and the Fidelity Growth Opportunities ETF (FGRO) came earlier this year.

Fidelity now manages roughly $31 billion in ETF assets overall and has generally been successful in building up its presence over time, but it's still on the 14th largest ETF issuer today.

American Century

American Century first entered the fray back in 2018 with a mix of equity and fixed income products. The first equity funds followed the low cost, passively-managed playbook with the U.S. ETFs charging just 0.29% annually.

The company made news in 2020, however, when it launched its lineup of active non-transparent equity ETFs. I've argued that the active non-transparent structure essentially mimics that of mutual funds, where holdings were typically only disclosed on a quarterly or, at best, monthly basis. The transparent structure of ETFs was what helped draw investors away from mutual funds and towards ETFs in the first place, so I'm not sure why going back was suddenly going to be appealing again.

Sure enough, the company's active non-transparent lineup has been a disappointment, gathering less than $1 billion in total. Capital Group won't be going the non-transparent route, but this is an example of a major mutual fund provider gaining little traction in the ETF space. American Century manages less than $2 billion across its entire lineup.

T. Rowe Price

T. Rowe Price offers a very similar story to that of American Century - late arriver to ETFs going the active non-transparent route mimicking, at least in part, some of its successful mutual funds, including the T. Rowe Price Blue Chip Growth Fund (TRBCX). It's had even less success than American Century, netting just over $400 million across its quartet of new ETFs one year after their launch.

Dimensional Fund Advisors

Dimensional manages about $31 billion in ETF assets currently, but before you're too quick in calling them a success story, remember that these assets were converted to ETFs from their existing mutual funds.

I mention this not because it's a direct comparison to what Capital Group is doing, but because I think this is where the industry might be headed next - mutual fund companies simply converting existing funds over to ETFs instead of launching new ETFs altogether.

Conclusion

I have a soft spot for the American Funds given their place in my childhood, but I'm skeptical that Capital Group is going to experience much success with their new ETF lineup. It's certainly a news story because it's one of the world's largest active fund managers, but I think there are simply too many factors working against it to think it will be a big success.

If it's announced that they're going rock bottom on fees, think 0.20% or less, they may gain some traction. I think it's more likely they're going to come in at around 0.40% to 0.50%. If that's the case, offering a fairly vanilla strategy at a comparatively high fee is not a recipe for success.

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