ETF Series: What They Are and Why They Matter for Investors
ETF Series are increasingly prominent in Canada and are poised to reshape the U.S. ETF landscape.
ETF Series are an additional series offering of an existing or new mutual fund trust, and they have been growing in popularity in recent years. As more investors become increasingly familiar and knowledgeable about ETFs, it is being chosen as the preferred investment vehicle over mutual funds.
Given that ETF series typically charge the same fee as their series F mutual fund counterparts and provide exposure that is identical to other series of the same mutual fund; it allows investors to have access to their chosen investment strategy within their preferred investment structure and allows ETF Issuers to retain assets within their funds.
Another benefit ETF series offerings provide is scale, as the assets of multiple series are managed in one fund. With a fund's growth, certain fixed costs can be reduced, and transaction costs can potentially be lower when trading because the portfolio manager has a larger pool of assets to transact.
ETF Series poised to grow in the U.S.
While many of Canada's ETF Issuers have made ETF series offerings available for their investment mandates for quite some time, this is a fairly new development in the U.S. that is poised to reshape the ETF landscape.
Over the last year, U.S. asset managers have begun contacting the U.S. Securities and Exchange Commission (SEC) about offering multi-share-class mutual funds that include ETFs. Currently, the feature is only available through exemptive relief from certain aspects of the Investment Company Act of 1940. It was also explicitly excluded from the SEC's 2019 ETF rule, which aimed to modernize the regulation of exchange-traded funds and allow them to launch without having to apply for individual exemptive relief.
In the last year, a total of 18 firms have applied for relief to allow their funds to have a multi-class structure. Vanguard was the only asset manager allowed to offer its products this way until May 2023, when its 2000 patent on the structure expired. When Vanguard's patent expired, other firms - including Morgan Stanley, Fidelity, GMO and Franklin Templeton - quickly filed applications to offer their own funds with this multi-class structure.
Should the SEC approve exemptive relief for the firms requesting it, the U.S. ETF landscape will change materially. In the U.S., mutual fund-to-ETF conversion is robust. A recent report from Brown Brothers Harriman, one of the largest investment banks in the U.S., states that since 2021, 32 sponsors have converted 71 mutual funds to ETFs, representing $70 billion in ETF AUM at the time of conversion. Offering ETFs as a share class would remove the need for wholesale conversions.
Takeaway
Product innovation and advances in fund regulation over the years have transformed the investment opportunities available to investors, resulting in lower costs and greater choices for investors. The ETF Series is an example of how continuous improvement can create better product offerings for investors, resulting in a greater investment experience.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
