US Giants Convert Mutual Funds to ETFs
Investors save Taxes and Fees, gain Transparency and Trading flexibility
Eaton Vance Total Return Bond ETF (ticker EVTR) is the new name for MSIFT Core Plus Fixed Income., and Eaton Vance Short Duration Municipal Income ETF (ticker EVSM) is the new name for MSIFT Short Duration Municipal Income Portfolio. These two conversions happened in March 2024.
Elsewhere in fixed income ETFs, the world’s biggest bond manager, Pimco, has recently made a regulatory filing to switch its Mortgage Backed Securities Fund into an ETF.
Other conversions on the equity side have included Dimensional US Core Equity 2; JPMorgan International Research Enhanced Equity; Fidelity Enhanced Large Cap Value ETF; and Fidelity Disruptive Automation.
Altogether at least 70 US mutual funds have switched into ETFs over the past few years, according to Morningstar Direct, since SEC rule changes in 2019 made the process easier.
The reasons for the Eaton Vance conversions cited by Morgan Stanley Investment Management include, “tax efficiency, transparency, value and trading flexibility”.
The big tax angle is deferring capital gains tax until the ETF is sold, whereas the liability can crystallize around year end for many mutual funds. This can have a huge impact on the long term compounding of returns. US capital gains tax can be 15% or 20% on assets held over a year, while those held under a year are taxed as income, with Federal income tax rates between 10% and 37%. Paying tax after many years leaves more time for the investment to grow.
In some cases, investors also avoid front end load sales charges on mutual funds, and 121b marketing and distribution fees that can be as high as 0.75% a year.
The ETFs often also charge lower ongoing management fees than the mutual funds. The conversions might seem self defeating for fund managers, but if an ETF helps them to gather more assets for very scalable strategies, it could pay off in the long run.
Some fund managers have also launched an ETF parallel to a mutual fund running the same strategy so that investors can choose which vehicle they prefer.
ETFs trading throughout the trading day with real time pricing moving with the market, offer more flexibility and trading opportunities than mutual funds, which usually only trade once a day at one valuation.
