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JPMorgan to Convert $10B in Mutual Funds to ETFs

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What You Need to Know

  • J.P. Morgan Asset Management plans to convert four mutual funds to ETFs next year.
  • Boards will have to approve the moves, which are set for early 2022.
  • The move follows Dimensional Fund Advisors' conversion of $29 billion of mutual funds into ETFs.

J.P. Morgan Asset Management announced Wednesday plans to convert four of its mutual funds — with $10 billion in assets under management combined — to exchange-traded funds sometime early next year, subject to the each fund’s board approval.

The company stated that the ETF vehicle is a structure that is “well-suited to the four mutual funds currently in scope and will be beneficial to the investors.”

The conversion continues a trend on moving mutual funds into ETF vehicles. In June, Dimensional Fund Advisors converted $29 billion in mutual funds to ETFs. Bloomberg said at the time that this move would start a major trend over the next 10 years.

Two notable advantages ETFs have over mutual funds is they are typically cheaper and more tax-efficient, said Daniel Sotiroff, analyst of passive strategies of Morningstar Research Services, who covers DFA.

“A couple of things enabled more active management to get into the ETF space over the past couple of years,” Sotiroff told ThinkAdvisor. “[First] you had the ‘ETF Rule’ that sort of democratized the ability of asset managers to take advantage of some of the exemptions that were previously only granted to a few firms. That really came down to doing things like custom baskets and being able to take full advantage of the tax efficiencies that are in the ETF wrapper.”

He said another factor is the rise of nontransparent structures in active management that don’t have to disclose holdings every day like most ETFs, which also attracted active managers.

Funds Making Change

The four mutual funds converting to ETFs are:

  • JPMorgan International Research Enhanced Equity Fund (OEIAX: AUM $5 billion)
  • JPMorgan Market Expansion Enhanced Index Fund (OMEAX: AUM $1.1 billion)
  • JPMorgan Realty Income Fund (URTAX: AUM $2.2 billion)
  • JPMorgan Inflation Managed Bond Fund (JIMAX: AUM $1.4 billion)

J.P. Morgan Asset Management has $2.6 trillion in assets under management as of June 30, 2021.

Before the conversion can take place, each mutual fund board must approve the move. The firm noted that “it is anticipated that if the conversions are approved by the boards of the funds, they would not require shareholder approval prior to implementation.”

The boards, however, will request that shareholders elect a common board of 16 to govern the entire J.P. Morgan Fund complex, the company said.

J.P. Morgan Asset Management currently has a U.S. ETF suite of 36 products with more than $64 billion in assets,

“As a leading active manager, it is important to us that we continue to deliver our investment capabilities in the vehicle that meets our clients’ desired outcomes,” said Bryon Lake, head of Americas ETFs, in a statement. “The intraday liquidity, transparency and potential tax benefits that come with ETFs carry significant value to many investors, and these particular strategies are well suited for the ETF structure.”

Bloomberg noted that two other major advantages of conversions are that the ETF gets to keep the investor base and assets, and that it can market its former performance.

Dimensional Fund Advisors also plans to convert two more of its international mutual funds to ETFs later this year, Sotiroff said.

He added that he’s not sure how far this trend could go as there are some hurdles. For example, giving $10,000 to a mutual fund company means that amount is fully invested, while with an ETF, an investor can only buy whole shares.

“So there are pros and cons to it,” Sotiroff said. “But I think there are more advantages on the ETF side, so I wouldn’t be surprised to see more of these conversions.”