A small mutual-fund provider has made history by becoming the first to formally change its products into exchange-traded funds.
Guinness Atkinson Funds announced on Monday that it had converted two of its mutual funds into the SmartETFs Dividend Builder (DIVS) and SmartETFs Asia Pacific Dividend Builder (ADIV). The conversion was a non-taxable event for shareholders, and the funds will retain their performance history.
It’s a big moment for the $5.9 trillion U.S. ETF industry, which has long been considered the scrappy upstart to the more established, mature market for mutual funds.
Generally lower costs, easier access and tax advantages mean ETFs have been luring assets away from mutual funds for years, and this week’s conversions could be the start of a wave. Quant giant Dimensional Fund Advisors is already next in line, with a far more substantial switch set to take place next month.
“It could shake up the landscape a little,” said Sal Bruno, chief investment officer of IndexIQ. “The first one is going to be the most difficult, but once that road gets paved a little bit, I think we’ll see some more come in.”
The U.S. ETF industry took in almost $500 billion last year, while mutual funds lost about $362 billion, according to data compiled by Bloomberg. That’s helped push total ETF assets up from about $4 trillion at this time in 2020.
Bloomberg Intelligence estimates active managers could bring $100 billion to the ETF industry through the mutual-fund conversions as well as other internal asset moves.
Los Angeles-based Guinness Atkinson is already planning to convert its Alternative Energy Fund into the SmartETFs Sustainable Energy ETF. But the small size of its funds -- DIVS has $23 million and ADIV has $4.4 million -- mean all Wall Street eyes are now set to turn to Dimensional.
The Austin, Texas-based manager of $601 billion will start converting around $26 billion worth of mutual funds into ETFs beginning in early June. That will catapult the firm to become one of the 12 largest ETF issuers in the U.S., according to Bloomberg Intelligence. It only entered the market last year.
While the Guinness Atkinson conversion is formally the first, the shift of assets between the fund classes has long been an industry feature. Most notably, Vanguard Group has been converting some mutual-fund holdings to lower-cost ETFs, although these are structured as a share class within the mutual-fund business.
Meanwhile, not every mutual fund can easily transform into an ETF. Many have broad multiple share classes and are distributed across a variety of platforms, according to Ben Johnson, director of global ETF research at Morningstar Inc.
“For example, it would be difficult and generally inadvisable to convert a mutual fund that is predominantly owned in employer-sponsored retirement programs into an ETF,” he said. “Most of these programs don’t have the plumbing to accommodate ETFs and the benefits of the ETF wrapper don’t have the same appeal in a tax-deferred setting that’s designed for long-term savings.”
The new Guinness Atkinson ETFs got off to a slow start, with only $27,000 worth of shares traded in DIVS and $25,000 in ADIV during their first day.
All the same, the conversions mark a new phase in the tug-of-war between the structures. Even as the firm was finalizing the switches, yet another manager -- Adaptive Investments -- was filing to change some of its mutual funds into ETFs.
Also in the queue is a small cannabis fund, which perfectly encapsulates why issuers are looking to make the jump.
Foothill Capital Management’s Cannabis Growth Fund (CANNX) has returned more than 140% in the past 12 months, but despite its success has less than $7 million in assets.
In contrast, pot ETFs have been enjoying record popularity. The ETFMG Alternative Harvest ETF (MJ), which has returned 95% in the past year, has $1.8 billion in assets.
“Managers are getting more adept at identifying the benefit that the ETF could present,” said Ryan Sullivan, senior vice president of Brown Brothers Harriman’s global ETF services. “That should give them a tailwind to get their boards comfortable with it.”