Huntington Asset Advisors Inc. might be the first fund company to convert an existing mutual fund into an actively managed exchange-traded fund, but it won't be the last, observers say.
On June 17, Huntington Asset Advisors Inc., the investment arm of Huntington Bancshares Inc., Columbus, Ohio, filed with the Securities and Exchange Commission to launch two actively managed ETFs. They are the Huntington Ecological Strategy Fund, which will look to follow environmental themes, and the Huntington Rotating Strategy Fund, an ETF version of its Huntington Rotating Markets Fund, which seeks to shift holdings among various equity market segments where the firm sees opportunities, Randy Bateman, Huntington's president and chief investment officer said in an interview.
Once the ETF is up and running, Huntington plans to fold the nine-year-old Rotating Markets Fund into it, he said.
“We think the ETF market offers some advantages over mutual funds, and we want to participate in it,” Mr. Bateman said.
In the first five months this year, ETFs drew net inflows of $22.7 billion, and now have $788 billion in assets, according to Strategic Insight.
Huntington joins a number of fund companies that have filed with the SEC to launch actively managed ETFs. In the past few weeks, BlackRock Inc and The Dreyfus Corp. also have filed to launch such ETFs.
There are a total of 23 actively managed ETFs with a total of $2.2 billion in assets, according to Morningstar Inc.
For the most part, fund companies are filing to launch actively managed ETFs as placeholders so they can be ready if these products take off in popularity, observers say.
“They just want to have the opportunity available to launch these offerings, but they aren't rushing to get to market with them,” said Paul Justice, an analyst at Chicago-based Morningstar.
Their reluctance to launch actively managed ETFs stems from the fact that unlike mutual funds, ETFs offer real-time trading information, and thus could put firms at a competitive disadvantage — particularly if they have active ETFs that replicate their mutual funds.
By folding its mutual fund into the new ETF, Huntington hopes to sidestep that issue altogether. Others will likely follow, said experts.
“I think this is going to be the first of many,” said Tom Lydon, president of Global Trends Investments, Irvine, Calif., about the ETF.
Fund companies realize that they have to get into the ETF market to grow, but there are already too many index-based ETFs, he said. As a result, these firms are going to turn to active strategies, and that will likely mean taking some of their mutual fund portfolios and converting them into ETFs.
“I think there will be more companies that do this because it's going to be more economically favorable for advisers and their clients,” Mr. Lydon said.
The Huntington Rotating Markets Fund is a fund of funds, which makes it easier to disclose real-time trades without giving away too many trade secrets, said Tom Graves, equity analyst at Standard & Poor's, New York.
“In these kinds of diversified funds, a decision to buy or sell a stock isn't going to be viewed as a significant type of disclosure,” he said. “I would gather that the more diversified funds are going to be the most likely candidates for this kind of transition.”