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Why Capital Group's ETF Launch Stands Out

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What You Need to Know

  • Its ETFs, expected to launch in late Q1 2022, will not be clones of existing mutual funds and will be fully transparent.
  • The five equity ETFs and one bond ETF will be low cost and use the Capital Group's name, not the American Funds brand.
  • The firm's CEO says the ETF business will be another tool to extend the firm’s model portfolios for the wealth management channel.

Capital Group is going its own way in its plans to launch ETFs. Unlike T. Rowe Price and Nuveen, which also recently entered the active ETF space, Capital Group will not be launching clones of existing mutual funds. Nor will its ETFs, like theirs, be semi-transparent.

Unlike Dimensional Fund Advisors and JPMorgan ETFs, none of its ETFs will be conversions of existing mutual funds. (Some, not all, of those firms’ ETFs are conversions).

Capital Group plans to launch six actively managed, fully transparent ETFs in the latter part of the first quarter of 2022. Five will be equity ETFs, including three focused on U.S. stocks, and one will be a bond fund ETF; all will fully disclose their holdings on a daily basis.

“The fixed income ETF will be a brand new core-plus strategy and is the first in what we expect to l be a suite of Capital Group fixed Income ETFs,” said Holly Framsted, head of ETFs at Capital Group, in a company webinar. “The five new equity ETFs are designed to “complement our firm’s existing mutual funds,” said Framsted. “They will not be clones of the American funds.”

Framsted, who joined the firm from BlackRock in March, explained that the “daily disclosure of holdings will give market makers the insight they need to lower the costs of execution” and are more tax-efficient than semi-transparent ETFs. They can use custom baskets for creations and redemptions, which allows the ETFs to dispose of appreciated securities in-kind and avoid recognizing taxable realized gains.

A ‘Transformative Event’

Tim Armour, chairman and CEO of Capital Group, which has $2.6 trillion in assets, says the launch of the ETF franchise will be a “transformative event” for the asset management industry, which is in “the very early stages of the active ETF market,” and for Capital Group. The 90-year- old firm will be able to offer a popular investment vehicle to more investors and advisors, including advisors who invest primarily in ETFs. The firm serves more than 200,000 financial advisors in the U.S.

Armour said he sees “no reason Capital Funds’ ETFs can’t become a $500 billion business in the future,” much like the firm’s fixed income business.

When Capital Group’s ETFs launch next year, they will carry the Capital Group name, not the American Funds brand of the firm’s mutual funds, and they will be low cost, says Armour. He was unable to elaborate because the funds are currently in the registration process with the Securities and Exchange Commission.

Matt O’Connor, CEO of American Funds Distributors, said the firm’s ETF business will be another tool to extend the firm’s model portfolios for the wealth management channel.