History Made With First U.S. Mutual Funds Converted to ETFs

The growing U.S. ETF industry marked another milestone Monday when the first ETFs converted from mutual funds started trading.

They are Guinness Atkinson Asset Management’s SmartETFs Dividend Builder (DIVS) and its SmartETFs Asia Pacific Dividend Builder (ADIV), which were converted from the the firm’s Dividend Builder Fund ( GAINX) and Asia Pacific Dividend Builder Fund (GAADX), respectively. Both are actively managed ETFs.

The conversions were automatic and non-taxable events for shareholders, and the fees of the new ETFs are lower than those of their mutual fund predecessors — 0.65% for DIVS versus 0.68% for GAINX and 0.78% for ADIV versus 1.12% for GAADX until at least through June 2024.

A ‘Better Value for Investors’

“This move represents the culmination of a dialogue we’ve had with our shareholder base, who like many are increasingly attracted to the benefits of ETFs, including their lower costs and greater flexibility,” said Jim Atkinson, CEO of Guinness Atkinson Asset Management, in a statement.  He noted that the firm chose the two mutual funds that were converted to ETFs  based on their “defined, rule-based strategies that are complementary as part of a broader equity asset allocation” and that “are attractive to many investors seeking dividends.”

Atkinson told ThinkAdvisor in December that he had “come to the conclusion that ETFs are a better value proposition for investors.”

The investment approach and portfolio managers of the new ETFs are the same as those of their mutual fund predecessors.

The Smart ETFs Dividend Builder ETF invests in dividend-paying companies that have had an inflation-adjusted cash flow return on investment of at least 10% in each of the last 10 years. The Smart ETFs Asia Pacific Dividend ETF invests in dividend-producing stocks of mature companies in the Asia Pacific region.

More Mutual Fund Conversions to ETFs Expected

These new ETFs are not the first ETFs for Guinness Atkinson, which previously launched a SmartETFs Smart Transportation & Technology ETF (MOTO), SmartETFs Sustainable Energy II ETF (SULR) and SmartETFs Advertising & Marketing Technology ETF (MRAD) as part of its SmartETFs family of funds.

Moreover, the new ETFs will not be the last actively managed mutual fund conversions to ETFs in the asset management industry. DFA, for one, is set to convert six mutual funds to ETFs, including four in mid June.

Ben Johnson, director of global exchange-traded fund research at Morningstar, said the DFA conversions will be “the most meaningful event on the horizon” for mutual fund conversions since they “will involve tens of billions of dollars and be the first large-scale test of this process.”

If the DFA conversions go well, Johnson suspects many of its competitors will seriously consider following suit, but whether they pursue them will depend on multiple variables including each fund’s investor base and where it is distributed.

“Converting tax-managed mutual funds to ETFs to help improve their tax profile for (presumably) taxable investors makes a ton of sense for the DFA funds that are slated for conversion,” said Johnson. “It might make much less sense for funds that are mostly distributed through 401(k)s, where tax efficiency is a moot point and plans’ plumbing isn’t particularly ETF-friendly.”

Todd Rosenbluth, head of ETF and mutual fund research at CFRA, said he expects “more funds will begin the conversion process, particularly if they have limited assets and have struggled to gain traction.” He added that shareholder approval is required for such conversions, which could prove “more challenging for those mutual funds with multiple share classes.”

(Image: Shutterstock)