Active ETFs Allan Roth Says You Might Consider
In late February, Capital Group, the parent of American Funds, launched its first six exchange-traded funds and has filed for more.
In a bear market for both stocks and bonds, they nonetheless have passed the $3 billion mark in total. The ETFs are laid out in the table below:
Ticker | Fund | AUM | Expense Ratio | Segment |
$727.11M | 0.39% | Equity: Global - Total Market | ||
$716.85M | 0.33% | Equity: U.S. - Total Market | ||
$505.30M | 0.47% | Equity: Global - Total Market | ||
$462.34M | 0.54% | Equity: Global Ex-U.S. - Total Market | ||
$323.78M | 0.33% | Equity: U.S. - Total Market | ||
$286.23M | 0.34% | Fixed Income: U.S. - Broad Market, Broad-based |
Five are equity funds, while the last is fixed income. I haven’t been kind to new ETFs such as single-stock ETFs and levered inverse ETFs. But these are different.
Capital Group has been serving investors since 1931, and its American Funds is one of the nation’s oldest mutual fund families.
For most of its history, they were distributed through investment advisors, often with 12b-1 loads. While they were relatively tax efficient, the ETF structure should allow even more tax efficiency due to the creation and redemption process. Indeed, Morningstar gives all six funds its’ highest “gold” forward ratings.
I spoke with Holly Framsted, director of ETFs at Capital Group. She explained that these new ETFs weren’t branded under the American Funds name, as they’re not clones of any American Funds. Though the funds can be bought directly without an advisor, Framsted noted Capital Group believes investors are best served working through advisors.
“These are actively managed strategies, and the number of holdings can and will vary. Currently our equity ETFs hold around 50-125 holdings each,” she explained.
Framsted told me the expense ratios were in the lowest quartile of ETFs, before clarifying that this was relative only to active ETFs. Although the fees are lower than many, they’re still higher than broader total stock ETFs such as the Vanguard Total Stock Market ETF (VTI) and the iShares Core S&P Total U.S. Stock Market ETF (ITOT), which both have expense ratios of 0.03%.
I turned to Elisabeth Kashner, FactSet Research Systems’ director of global fund analytics for her thoughts. CGGR and CGGO are cost leaders among their actively managed competitors, she said, and CGXU has just one lower-priced active rival. These ETFs have three to five rival active ETFs in their respective segments.
Plenty of room is available in these markets for lower-cost active ETFs. However, CGDV and CGUS are not particularly competitive. DFA, Vanguard and American Century have undercut Capital Group here.
“We will know more in a few months, when asset managers announce capital gains distributions. But given this year's equity market losses, we might not get all that much info this time around,” Kashner said with regard to the funds’ potential tax efficiency.
My View
The Capital Group equity ETFs hold promise. I’d avoid the fixed income ETF as CGCP holds nearly 17% of its assets in either below BBB or nonrated debt. A better-known name for below investment grade is “junk.”
For many years, American Funds had index-besting performance, and even today, their largest funds have relatively good long-term performance versus the appropriate indexes. A dozen years ago, I wrote a piece noting the magic wasn’t gone at American Funds. That said, I wasn’t close to buying loaded funds with less tax efficiency.
While I suspect part of the reason for the entry into the ETF space was due to the American Funds’ negative fund flows over the past decade, the absence of loads and the increased tax efficiency make Capital Group’s ETF lineup worth another look.
And Framsted is correct when she states American-gained market share in the active space. Active fund market share has declined significantly over the past few decades, so they are getting a bigger share of a smaller part of the fund universe.
Unlikely to Recommend
That said, my mantra that investing is simply “minimizing expenses and emotions; maximizing diversification and discipline” makes it unlikely for me to buy or recommend these ETFs to clients. While an ETF with 100 stocks may be diversified—and the Capital Group equity ETFs have between 50 and 130 components—that doesn’t approach the more than 4,000 securities held within an ETF like VTI for a 0.03% annual expense ratio.
“Capital Group's ETFs may be less costly or less concentrated than some of their rivals, especially in market segments where only a handful of actively managed ETFs compete. But they are still far pricier and far more concentrated than the most efficient ETFs in their market segments, which offer broad-based, cap-weighted, highly tax-efficient portfolios at ultra-low costs,” Kashner said, and I agree.
But for those wanting a disciplined active manager with low costs relative to other active funds, these five Capital Group ETFs are worth a look. In fact, if I were to buy an active equity fund, I would buy one of these.
Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for Barrons, AARP, Advisor Perspectives and Financial Planning magazine. You can reach him at ar@DareToBeDull.com, or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.
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