On February 20, 2025, the CFA Society of Chicago’s Education Advisory Group (EAG) partnered with Women in ETFs (WE)to host, Smart Investing: The Power of ETFs. The sell-out crowd gathered at Morningstar’s headquarters to hear from a panel of experienced professionals on the topic of active Exchange Traded Funds (ETFs).
Moderating the panel was Ben Johnson, CFA, Head of Client Solutions at Morningstar. Johnson was joined by Michelle Mikos, Rob Marrocco, Alisa Maute, and Rob Harvey. Michelle Mikos is Managing Director of ETF Due Diligence for Invesco’s exchange-traded funds (ETFs). Rob Marrocco is Vice President and Global Head of ETF Listings for Cboe Global Markets. Alisa Maute, CIMA, CAIA, is the Executive Managing Director and Head of New Client Development for Mercer Advisors. And Rob Harvey, CFA, is Co-Head of Product Specialists at Dimensional Fund Advisors. Johnson opened the panel by proclaiming winter over in Chicago. The audience all hoped he had not jinxed the Windy City with his call.
Johnson started the session by reminding the audience that while Bear Stearns launched the first actively managed ETF, Invesco was a pioneer in active ETFs. Johnson asked Invesco’s Mikos to reflect on the history of active ETFs. Mikos segmented history into three phases. First, from 2008 through 2012, Mikos recalled investors buying star managers, like Bill Gross at PIMCO at the time, who could be accessed through active ETFs. Mikos then described the period 2014 through 2020, where issuer-specific ETFs drove investor demand, citing ETFs offered by ARK Invest as an example. Finally, for the last four to five years, Mikos believes investors have been more intentionally seeking out particular active ETF strategies. Marrocco jumped in to say that regulation was a major gating factor in the early days of active ETFs, when it might have taken a year and a half to complete the Securities and Exchange Commission (SEC) approval process. Now, it is easier and quicker to get an active ETF to market, he added. A change in regulation, the adoption of SEC Rule 6c-11, was required to prompt Dimensional Fund Advisors, Harvey’s firm, to launch active ETFs.
Maute introduced a theme that recurred throughout the discussion. She was not surprised that active ETFs have grown significantlys stating they are simply a better wrapper and product than a mutual fund. She tempered her argument by stating that mutual funds are not on the way out, considering the “piping” of 401 (k) programs are set up for mutual funds, ensuring a reliable market for them. Marrocco declared that cannibalization of mutual funds by ETFs is an overblown myth. Mutual fund investors with large embedded capital gains are not going to shift to an ETF clone to save a little bit on the expense ratio, if they have to recognize their capital gain. Harvey explained that his firm offers investors the choice of mutual funds or ETFs. They realize that ETFs are better for some investors, and they expect some cannibalization of their mutual funds.
Johnson asked Mikos if she believed that buyers’ due diligence teams are more comfortable with active ETFs these days. Mikos explained that the home offices of investment groups had to build out their research capabilities to properly cover active ETFs. Mikos believes that these groups have ramped up, and are ready to engage, as she has had more conversations about active ETFs in the last 15 months than she did in the previous 15 years. She add that covering active ETFs is not easy as it is a big, diverse space, as most panelists referred to during the event. There are fundamental active ETFs, systematic active ETFs, and then many more unique classifications. Mikos believes home offices are focusing more on fundamental active, rather than systematic active, ETFs.
A few times, Marrocco reminded the group of a potential disadvantage for some ETFs. While large, established, liquid ETFs trade with very tight bid-ask spreads, some ETFs have a rather large spread. And this is a cost that must be monitored, especially for investor groups who are switching from mutual funds to ETFs and may not be aware of this implicit cost. Maute commented later that there is much work to do to educate investors about the total cost of ownership of ETFs versus mutual funds.
Johnson invited questions from the audience. An attendee asked what break-even level of AUM is required to launch an ETF. Marrocco addressed the question first, estimating that $30-50 million is a reasonable break-even range. Marrocoo added that profitability depends on many things, such as how many ETFs you plan to launch. Maute built on Marrocco’s comments, explaining that white label ETF shops are seeing great demand from smaller
managers, some of which may only launch a few ETFs. Mikos advised the questioner to think about not just launch costs, but expenses necessary to support an ETF in the market post-launch. Harvey reminded the group that, despite the strong growth in AUM that active ETFs are seeing, this remains a competitive business. Hundreds of ETFs closed last year, he said.
The second and final question of the night was “do managers that have a mutual fund and an ETF clone use the same board of directors.” The answer seemed to be yes and no. There is no standard of practice. Harvey noted that his firm uses the same directors for its mutual funds and ETFs.
And that wrapped up a lively and engaging hour of conversation on active ETFs. Much of the audience gathered for appetizers and soft drinks after the event to continue the discussion and network.