Pathways to ETFs for Mutual Fund Managers

Transitioning mutual funds to ETFs is a growing strategy across the U.S. fund industry. To help mutual fund managers determine the best path forward for their business, Cboe^TM and the Investment Company Institute gathered a panel of experts to discuss all aspects of the process, from regulation and back-office operations to capital markets, marketing and distribution. Find highlights below or watch a full replay here.

Following a brief introduction and overview by Jane Heinrichs, Associate General Counsel, Investment Company Institute, the webinar began and included the following panelists:

• Laura Morrison, Senior Vice President, Global Head of Listings, Cboe
• Kyle Murray, Vice President, Cboe 
• Jana Cresswell, Partner, Stradley Ronon
• Adam Teuful, Partner, Dechert LLC
• Marc De Luise, Director Listings, Cboe
• Ryan Sullivan, SVP, Head of U.S. Exchange-Traded Fund Services, Brown Brothers Harriman
• Mark Roberts, Vice President, ETF Management and Strategy, Fidelity Investments
• Reginald Browne, Head of ETF Market Making GTS-Mischler
• Ed Rosenberg, SVP, Head of Exchange Traded Funds, American Century Investments
• Eric Pollackov, Global Head of ETF Capital Markets, Invesco ETFs
• Victor Werny, Senior Analyst, Listings, Cboe
• David Geonetta, Vice President, ETF Management and Strategy, Fidelity
• Robert Marrocco, Senior Director, Listings, Cboe

Morrison kicked off the webinar with an overview of the ETF industry, sharing that ETFs are growing rapidly worldwide, with assets under management (AUM) in the United States approaching nearly $5 trillion. Further, the U.S. ETF space has already seen $500 billion of inflows year-to-date.

Morrison then shared three key reasons why now is the right time to host a forum about ETFs and mutual funds, including new Securities Exchange Commission (SEC) regulations, the growing number of mutual fund to ETF conversions and the creation of semi-transparent ETFs.

Key Legal and Regulatory Issues to Launch an ETF

Following Morrison’s introduction, Murray joined Cresswell and Teuful to discuss key legal and regulatory elements to consider when launching an ETF.

When thinking about their ETF strategy, Cresswell said there are several key factors for mutual fund managers to consider. Most importantly: is this investment strategy appropriate for an ETF? If so, which pathway is the best for this product—conversion or cloning?

There are pros and cons to both pathways, Teuful said. For example, while cloning provides more flexibility to set fees, the funds will still be compared against each other, potentially creating a need to justify why fees are higher or lower. Similarly, while conversion has the benefit of carrying the mutual fund’s performance record and assets, it requires consideration of how the shareholder base will be impacted.

With the risks and benefits of both pathways laid out, Cresswell then explained the process of converting a mutual fund to an ETF.

To wrap up the conversation, Teuful shared insight into how fund managers may determine whether to use a traditional ETF structure or a semi-transparent ETF structure.

Fund Operations

Next up, De Luise, Sullivan, and Roberts discussed the behind the scenes work that goes into creating and listing an ETF.

To start, Sullivan explained the operational differences between mutual funds and ETFs, including practical implementation and day-to-day operational requirements.

Sullivan then explained the five unique ETF operational requirements that differentiate an ETF from a mutual fund.

With the perspective of running the back-office operations for both mutual funds and ETFs, Roberts shared insight into the challenges and benefits of each. Roberts said the accounting and NAV calculation are similar for both, as is much of the data dissemination. He also emphasized the importance of a Capital Markets team that can focus on the secondary market and the factors that don’t exist in mutual fund operations, like authorized participants and market makers.

ETF Capital Markets

Picking up where Sullivan and Roberts left off, Browne, Rosenberg and Pollackov then joined Werny to discuss capital markets in more detail.

Browne, whose firm is the lead market marker for over 200 products, first shared an overview of the role of a market maker and key differences between ETFs and mutual funds.

Pollackov oversees capital markets for more than 230 ETPs. From his perspective, he explained the role of a firm’s capital markets team, which ranges from explaining how products work on exchange and, the costs associated with the ETF creation and redemption process to investigating trading issues.

Expanding on Browne and Pollackov’s insights, Rosenberg shared certain factors to consider when creating an ETF versus a mutual fund. Factors include the best structure for the type of product that will meet investor demand. Importantly, he said he and his team always ensure they will be adding something new to the space before moving forward with a product.

The conversation concluded with more details about how market makers quote ETFs, Rosenberg’s thoughts on what’s next for semi-transparent ETFs and Pollackov’s emphasis on a need for greater accessibility for the space to grow.

Distribution and Marketing

Rosenberg joined Geonetta and Marrocco for the webinar’s final conversation about distributing and marketing ETFs.

Rosenberg explained how his firm, American Century Investments, successfully offers both mutual funds and ETFs to clients. The key, according to Rosenberg, is top-notch product education and leveraging the existing sales team.

Geonetta then answered the question on everyone’s mind: does offering ETFs and mutual fund clones create friction? He shared that offering both can help a firm remain vehicle agnostic, providing customers investment capabilities in whatever vehicle suits their needs.

Finally, to wrap up, the group discussed marketing strategies, how ETFs can bring in new clients in addition to mutual fund clients and next steps for promoting new products.

The full webinar is available for replay online. 

The information in this article is provided for general education and information purposes only. No statements within this article should be construed as a recommendation to buy or sell a security or futures contract or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this article is available by contacting Cboe Global Markets at www.cboe.com/Contact. © 2021 Cboe Exchange, Inc. All Rights Reserved."