Looking to Attract new Investors, JPMorgan Follows the Mutual Fund to ETF Conversion Trend

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Exchange-traded funds (ETFs) have exploded in popularity since they were introduced in the 1990s. Like a mutual fund, one ETF invests in hundreds of stocks across various sectors. Some mutual funds and ETFs specialize in certain sectors like small cap stocks or consumer staples.

Unlike mutual funds, ETFs usually offer lower fees and greater tax advantages, which is why they’re becoming even more popular with younger investors. Many larger banks including JPMorgan Chase & Co. (NYSE: JPM) and Dimensional Fund Advisors have been converting more of their mutual funds to ETFs for these reasons and to attract new investors.

The New JPMorgan Realty Income ETF

The JPMorgan Realty Income Fund (NYSEArca: JPRE) was established as an open-ended mutual fund in 1998 and has become an ETF as of May 2022. Aside from this realty ETF, JPMorgan has converted its JPMorgan Inflation Managed Bond Mutual Fund (JIMAX) into the JPMorgan Inflation Managed Bond ETF (BATS: JCPI).

The JPMorgan Realty ETF has $1.2 billion in assets under management and invests in equity as well as debt real estate investment trusts (REITs) throughout the U.S. Some of its most heavily weighted holdings include Prologis, Public Storage and Equinix. It’s an actively managed fund with an expense ratio of 0.50%, which is much lower than the average equity mutual fund’s expense ratio of 0.71%.

Why Convert a Mutual Fund to an ETF?

By converting mutual funds to ETFs, fund managers can retain the track record of the fund. The track record can show a glimpse into its past performance and holdings. By maintaining this track record, fund managers won’t have to spend time and money creating new investment funds. Making this switch also prevents the fund managers from having to repeat securing and tying up seed capital from investors.

Another major reason behind ETF conversions is taxes. Mutual funds are relatively tax inefficient since they provide frequent capital gains distributions to investors.

Capital gain distributions occur when a mutual fund buys and sells its holdings. Investors have to pay taxes on these capital gains distributions if they have these mutual funds in taxable brokerage accounts.

On the other hand, ETFs are structured differently than mutual funds and have much fewer capital gains distributions, resulting in lower taxes for investors. ETFs are more liquid since they trade throughout the day like a stock. Mutual funds are less liquid since they only trade once per day at the market close.

Other Firms are Hopping on the ETF Conversion Bandwagon

Over the last 10 years, $1.8 trillion of investor funds has flowed into equity ETFs. More fund managers recognize this trend and want to convert their mutual funds to ETFs. These conversions will help them simplify their investments, provide tax advantages and entice more investors to buy their funds.

Dimensional Fund Advisors is also planning to convert six stock mutual funds into ETFs, with the first four conversions set for June. With this new arrangement, Dimensional Fund Advisors will be able to reduce its management fee by 28%.

Foothill Capital Management followed Dimensional Fund Advisors lead and converted its Cannabis Growth Fund into an ETF.

Final Note

Both ETFs and mutual funds offer investors access to hundreds of holdings across different sectors of the economy in one fund.

More investors are piling cash into ETFs over mutual funds because of lower fees like expense ratios, tax advantages like avoiding high capital gains distributions and greater liquidity. As a result, more established investment firms including JPMorgan and Dimensional Fund Advisors are converting their mutual funds to ETFs to attract the next generation of investors.

Photo by lentamart on Shutterstock

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