Capital Group, whose American Funds franchise manages $1.9 trillion in assets, isn't looking at conversions. Instead, the company is trying to build a global ETF brand under the Capital Group nameplate.
"They went against the grain — relative to many other active managers — and launched fully transparent ETFs," said Stephen Welch, senior manager research analyst at Morningstar. This gave Capital Group the ability to offer fixed income and international equities, neither of which are yet permissible in a variety of "semi-transparent" ETF structures approved by the U.S. Securities and Exchange Commission.
In March 2021, Capital Group hired industry veteran Holly Framsted from BlackRock, where she helped to grow factor, megatrend and sustainable ETFs. She was drawn to Capital Group as she observed that "active was going to be the next transformative change" in the ETF market.
Through September, actively managed products had attracted 25% of net ETF inflows, according to research firm ETFGI, despite accounting for roughly 6% of total U.S. ETF assets under management. Six of Capital Group's ETFs launched last year managed at least $1 billion at expense ratios between 0.33% and 0.54%.
In a recent interview, Framsted, now head of global product strategy and development, shared her views on the challenge and opportunity ahead for Capital Group as it wades deeper into the ETF business.
The following Q&A has been edited for length and clarity.
Q| What changed in the market that, after so many years, Capital Group decided to launch ETFs?
A| Until 2019, when the SEC passed the ETF Rule, active strategies in an ETF vehicle were not structurally able to deliver on the same layers of tax efficiency as passive investments. At that point Capital Group became incredibly committed to advancing efforts in ETFs because, finally, we were able to bring the best of who we are as an organization — long-term active management — and also deliver on the expectations of the ETF vehicle.
Q| There were fully transparent active ETFs in the market prior to Capital's entry. What is driving adoption now?
A| In the last few years wealth management home offices, individual investors and market makers have gotten increasingly comfortable with the ETF structure and what active managers are delivering. For us, it's about making sure that when we bring a product to market, it's going to deliver what our clients expect, which requires that ecosystem of availability and liquidity on exchange, and tax efficiency.
Q| American Funds is a strong brand in mutual funds. Why the Capital Group brand for ETFs?
A| First, we expect our ETFs to grow into a global franchise. The American Funds brand is strong in the U.S., but less so outside it. As we thought about a durable brand for our ETFs, Capital Group really rose to the surface. Second, our ETFs are rooted in the "Capital System" and follow the same core investment process as every investment strategy that you get from our organization. But, because of vehicle specific considerations, none of our ETFs are exact replicas of any other strategies. For that reason, we wanted to make sure that we weren't creating an environment of naming confusion.
Q| Can you offer some insight on how your ETFs differ from traditional funds or separate accounts?
A| Take the example of the Capital Group Growth ETF (CGGR). It has some portfolio manager overlap with Growth Fund of America, but not completely. The return profile comes from the convictions of our portfolio managers, analysts and research portfolios. To deliver those insights into the ETF vehicle, we have a team that is incorporating an overlay of tax management and an understanding of liquidity. We also built an ETF capital markets team that will help facilitate transactions through the creation and redemption process.
Q| How did you evaluate the various options for portfolio transparency in active ETFs?
A| Core to most of our investment strategies is flexibility, including investing outside of the U.S. and sometimes in fixed income. If we were going to offer ETFs, full transparency was really the most viable option. Within the Capital System, we have multiple portfolio managers and more holdings relative to some peers. We trade patiently and tend to have longer holding periods and lower turnover. It made us comfortable that transparency would work for how we manage money.
Q| Your current ETF asset level is a grain of sand in the world of Capital Group. What's the growth trajectory here?
A| ETFs represent roughly 30% of total fund industry assets and have been gaining about 1 to 3 percentage points of market share on mutual funds over the last number of years. We expect that trend to continue, particularly for tax-sensitive investors working with wealth advisers. A large portion of the 70% of assets that are in mutual funds today are in retirement accounts, particularly target-date funds. For those clients, there is not a clear articulation of the ETF being a superior or more relevant vehicle. And so, we believe, as an organization, there is space and need for both vehicles, as well as separately managed accounts and commingled investment trusts.
Q| Do you see interest in your ETF strategies from the non-taxable market?
A| Tax efficiency is a hallmark of the ETF vehicle in the U.S. But ETFs are growing in popularity globally, though no other jurisdiction around the world offers such favorable tax treatment. That tells me that for the non-taxable institutional investor ETFs can be powerful tools. We see that with ETFs that are large and liquid, providing opportunities for transition management and cash equitization. More traditional institutional vehicles require a layer of contracting.
Q| How is Capital Group helping to shift the narrative on what ETFs can offer?
A| ETFs are often synonymous with index investments. Our entrance and the growing relevance of active management in the ETF vehicle shows that the benefits of the structure are relevant to multiple styles of management and asset classes. Investors will be well served to think beyond ETFs as simply the absolute lowest-cost investment. They should see them as tools to drive greater liquidity with greater efficiency in the portfolio and that they can be held as long-term solutions to deliver superior results.