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Fund News Advisor Can Use: Morningstar Calls for Actionable Disclosures on Climate Change

In this week’s fund news, Morningstar provides a framework for climate change disclosures; T. Rowe launches fifth active ETF; and the space ETF UFO reminds investors 'unidentified aerial phenomena' may pose a risk.

Morningstar submitted a comment letter to the Securities and Exchange Commission this week regarding the agency’s evaluation of required climate change disclosures. The 133-page letter urges the SEC to make actionable disclosures mandatory, arguing that climate and carbon risk has become financially material for many sectors and publicly traded companies.

Sustainable fund disclosures, in particular, should help investors understand how the fund manages carbon and climate risk, Morningstar argues, or if it does so adequately to be truly considered a "sustainable" fund.

“Our data shows important differences in how funds approach carbon and climate risk, which the commission should consider as it contemplates new disclosures,” the letter said. “For example, while investors likely expect a fund that markets itself as ‘sustainable’ to have low exposure to carbon risk, we find that slightly less than half of the sustainable funds to which we assign a Carbon Risk Score do not receive our Low Carbon Designation. This data point—based on the asset-weighted Sustainalytics carbon-risk rating of companies held in a fund’s portfolio—reveals a possible disconnect between investor expectations and the realities of the portfolios in which they might invest.”

Morningstar also argues that the mutual fund industry should migrate to common definitions around sustainable strategies, something the firm is working on.

T. Rowe Launches Fifth Active ETF

T. Rowe Price has launched its fifth nontransparent active ETF, the U.S. Equity Research ETF (TSPA), this week. The fund is constructed similarly to the firm’s U.S. Equity Research mutual fund, and shares the same portfolio management team.

The new fund has an expense ratio of 34 basis points.

The firm made its first foray into the active ETF space in August 2020 with four funds, the Blue Chip Growth ETF, the Dividend Growth ETF, the Equity Income ETF and the Growth Stock ETF.

T. Rowe uses a proprietary portfolio disclosure process, so market makers have enough information to quote prices with a high degree of confidence.

“The U.S. Equity Research ETF will be characterized by rigorous and comprehensive research conducted by T. Rowe Price’s extensive team of equity analysts,” said Ann Holcomb, director of research, North America and co-portfolio manager, in a statement. “We will use their best ideas and our strategic, risk-aware investing approach to craft a portfolio that seeks to perform better than the S&P 500 for shareholders. We believe this strategy could be appropriate as a core building block for many equity portfolios and we look forward to offering it in the active ETF format.”

Investors Beware of Unidentified Aerial Phenomena

ProcureAM has updated the prospectus for its Space ETF (UFO) with a new risk that investors need to keep in mind: unidentified aerial phenomena, according to a report by CNBC.

A classified U.S. government report was recently leaked, which found that unidentified aerial phenomena, or UAPs, witnessed by Navy pilots were not alien spacecraft. But the military also could not explain the aircrafts’ movements.

“This is undoctored footage ... and we don’t know what to make of it,” ProcureAM CEO Andrew Chanin told CNBC. “To me, that just screams risk, risk, risk. And in our world, risk disclosure is very important.”

The Space ETF was launched in 2019 and has about $133 million in assets.

Citi Analysts: Active ETFs Fueling Shift to Mutual Funds

It’s the beginning of the end for the mutual fund wrapper, a recent Citigroup analysis predicts.

Citigroup found that most of the $21 trillion in U.S. mutual fund assets could likely shift to the ETF industry in the next decade, according to a Bloomberg report.

So far in 2021, ETFs have taken in $387 billion in new assets, compared with just $87 billion for the mutual fund industry, Bloomberg reports.

The active ETF structure is fueling that shift, the Citigroup report says, with nontransparent active ETFs accelerating that growth.

“It is the beginning of the end for innovation within the mutual-fund wrapper,” Citigroup analysts Scott Chronert, Drew Pettit and Mandy Chan wrote in a note Monday. “Increasingly, we see a trend where new, innovative, equity strategies are being brought to market via ETFs, both transparent and non/semi-transparent active (NTA), instead of mutual funds.”

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