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Merrill Lynch plans to triple the number of active exchange traded funds it features on its platforms, including ETF versions of mutual funds that already exist, according to a senior executive.
Stephen Patrickakos, head of traditional investments for Merrill, told Ignites the wirehouse’s full-coverage platform houses 100 active ETFs and aims to hit 300 over the next three to five years.
Merrill intends to select ETFs for its platforms by evaluating their size and performance, Patrickakos said.
“With a firm our size, if [financial advisers] start engaging and putting money to work, we could become overly concentrated in an ETF, or any structure, very quickly,” he said.
This article was previously published by Ignites, a title owned by the FT Group.
Of the 1,593 active ETFs on the market, there are some “we just probably wouldn’t be all that interested in generally. That usually cuts the list in half,” Patrickakos said.
Conducting due diligence on active ETFs is similar to evaluating mutual funds, he said.
There is, however, additional due diligence performed on the “effectiveness and efficacy” of the strategy in the ETF wrapper, such as trading spreads, a Merrill spokesperson wrote in an email.
Merrill is interested in adding ETF versions of mutual funds already featured on its platforms and strategies that are focused on large-cap, small-cap and growth value stocks.
However, the ETF versions of certain strategies, such as small-cap emerging markets strategies, have capacity constraints that their mutual fund versions do not have because ETFs cannot close to new investors like mutual funds can, Patrickakos said.
“So, to the extent we can do that, where we can have capitalisations represented, styles represented, we effectively love to have almost like a one-for-one mutual fund in an active offering,” he said.
Managers who are unable to close their ETFs to investors may be forced to deviate from their strategies or buy securities that they would not otherwise have bought, said William Whitt, strategic adviser at Datos Insights.
Patrickakos and his team will not necessarily replace mutual funds featured on the platforms with ETF versions, but Merrill has featured mutual funds that have already converted to ETFs, or ETF clones of mutual funds.
“We’re happy to do that, provided we’re given enough lead time and if it makes more sense to operate a strategy in an active ETF,” he said. “We’re very, very supportive.”
There are also regulatory concerns Merrill must consider when offering “substantially similar securities”, Patrickakos said.
“Provided the fees between the two aren’t wildly different or they’re within specific tolerance that we’re comfortable with, we can let them coexist,” he said. “If that doesn’t exist, we will have to take action and probably close down certain shares of the mutual fund.”
Merrill is also monitoring the applications for ETF share classes, Patrickakos said.
More than 20 firms have filed to offer ETFs as share classes of their existing mutual funds, and 72 per cent of advisers say they want access to ETF share classes, according to Ignites Research.
Regulatory approval for ETF share classes would allow for “far less complexity”, Patrickakos said.
Merrill’s plans to add more active ETFs are a “good reaction to them understanding the evolution of the market”, said Scott Smith, director of advice relationships at Cerulli Associates.
The number of ETFs that Merrill wants to add is “perfectly reasonable”, he said.
“I would imagine there’s more than 300 mutual funds in their line-up,” Smith said. “Certainly, they want to consolidate that, make that more manageable, but they also want to offer a variety of choices in each asset class.”
Actively managed ETFs are one of the fastest-growing segments within the industry, and major wirehouses such as Merrill simply cannot ignore the investor demand, said Nathan Geraci, president of The ETF Store.
“Wirehouses have become increasingly comfortable with the ETF wrapper, and issuers are now providing their top portfolio managers and flagship investment strategies via the structure,” he said. “The combination of these two trends is serving as a major catalyst for active ETF adoption.”
It has been critical for ETF issuers to “breach” wirehouses, as they control trillions of investor dollars and are “notorious for gatekeeping access to ETFs”, Geraci said, adding that smaller issuers are particularly affected by this.
In terms of other wirehouses, Wells Fargo offers 91 active ETFs on its wealth and business platforms, a spokesperson said.
UBS does not disclose the number of active ETFs on its platform, but the company was an early adopter of the vehicles, including semi-transparent varieties, said Mustafa Osman, the firm’s head of ETF and mutual fund strategy and analytics.
A Morgan Stanley spokesperson declined to comment.
*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignites.com.