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IS A MUTUAL FUND CONVERSION TO ETFS RIGHT FOR YOU?

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The Wealth Advisor Contributor
May 17, 2022

(ETF Database) - Mutual fund conversion to the ETF wrapper is an increasingly
popular option that companies have been partaking in for their clients in 2021
and 2022. The New York Stock Exchange recently hosted a webinar for asset
managers looking to grow their ETF business through the recently available
option of converting mutual funds to ETFs.

It also covered assessing the client base to determine what would best resonate,
various benefits and ways to convert mutual funds to ETFs, and more.

Hosted by Douglas M. Yones, head of exchange traded products at the New York
Stock Exchange, the webcast included guests Peter Shea, partner at K&L Gates;
Ryan Sullivan, head of U.S. ETF services at Brown Brothers Harriman; and Mo
Sparks, director of exchange traded products at the New York Stock Exchange.

ETFs have become enormously popular with investors, bringing in $1 trillion of
inflows in 2021, and with the passage of the ETF Rule 6c-11 in 2019 and its
being enacted last year, there has been a revolutionary approach to conversion
into ETFs, said Shea.

“That rule clearly contemplates that you’ll engage in reorganizations, mergers,
conversions of other products into ETFs, and for those transactions you are
exempt from needing to deal through an Authorized Participant, and you’re exempt
from dealing in creation unit aggregations of shares,” Shea explained.



It has made the mutual fund conversion process much easier, particularly with
major exchanges creating generic listing rules for these conversion funds, rules
that have requirements that are increasingly easing. Another enticing
possibility was the creation of semi-transparent ETF options that allow for the
daily holdings to be concealed and a proxy basket used instead as an example of
the holdings of the fund; this has been of particular interest for many mutual
fund managers.

“Even though we’re a couple decades into the ETF lifecycle, that growth
(speaking on the flows into ETFs last year) is accelerating, so that is a
massive tailwind now for managers looking at their mutual fund line-up, and as
Doug touched on it, some of them are already in the ETF space and looking to
retool those mutual funds that may have more upside as an ETF vehicle,” said
Sullivan.


BENEFITS AND CONSIDERATIONS WHEN CONVERTING

There are several benefits to converting a mutual fund to an ETF; wirehouse and
independent brokers generally want to see an established track record
and AUM minimums, which will have been well established by the mutual fund. From
a distribution perspective, when it comes to converting mutual fund strategies
into ETFs, a conversion eliminates the need to choose between a mutual fund and
an ETF that share a “cloned” strategy when listing them on a platform, explained
Sullivan.

Sullivan explained that there are generally three different channels that
clients fit into when considering a mutual fund conversion: “You’ve got the old
legacy, kind of direct shareholder and the retail base as one channel, you’ve
got your intermediaries and your broker-dealers in a second channel, and then
you’ve got your institutional investors in the third.”

Addressing how each client channel will be impacted by conversion requires
separate considerations and planning. How the internal teams and support will
change to accommodate an ETF vehicle, which requires tracking of things such as
liquidity and trading volume, is another conversation that should be had with
the intermediary clients.

“We’re seeing a growing interest amongst mutual fund sponsors who have
multi-class structures. A lot of the early conversions were very simplistic
class structures,” said Shea. “The big worry is that if you have a class that’s
paying sales loads to a brokerage channel, will that broker dump all the shares
as soon as you announce conversions because they’re going to be cut off from
their sales loads?”

While it’s something that can be avoided, and Shea explained that there is an
incentive to keeping them involved on the ETF side, it is vital that those
considering mutual fund conversion have these kinds of conversations as early as
possible with their intermediary clients.

Also discussed are tax benefits and fee structures, share class merging,
operational benefits and needs for ETFs, the conversion of SMAs, and questions
to ask when entering into the ETF industry.

By Karrie Gordon
May 13, 2022


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