F/m Investments Preps First Mutual Fund Shares of ETFs

Ready or not, 401(k) world, dual share classes are coming.

F/m Investments filed last Friday for the first mutual-fund share classes of ETFs, a bridge the company hopes to use to gain access to retirement plans. It represents one of the first prospectuses brought to the Securities and Exchange Commission for product-specific dual-share-class approvals. And it follows the regulator’s approval last week for an exemption requested by Dimensional Fund Advisors, which is the only firm so far to get the green light. F/m had not received that broad approval from the SEC as of Tuesday, though the company anticipates it soon.

“It’s strange that we’re talking about this accountancy issue as being interesting, but it really is,” F/m CEO Alex Morris said. In approving exemptions, the SEC has asked asset managers to file for dual share classes of all their funds, leaving it up to funds’ boards to decide which individual strategies should get either an ETF or mutual fund share class. “This is a really elegant way for fund boards and issuers to get products out there,” Morris said.

Track Racing

The big advantage for F/m is being able to port existing ETF strategies to mutual funds. Until now, firms have had to introduce separate products to accomplish that, and a drawback is that the performance history doesn’t necessarily count in the new vehicle. For 401(k) plan fiduciaries, that often means the new funds can’t be added to their menus, as they tend to look at three- or five-year track records in vetting investment options. With the mutual fund share class, the performance history of the ETF is there in writing, and the funds have the benefit of existing levels of scale, Morris said.

Despite the company filing for dual share classes of its roster of existing products, it is planning to add only two mutual fund share classes of existing ETFs initially, along with one ETF share class of a current mutual fund. The firm, which has over $18 billion in assets under management, expects to offer the strategies of its US Treasury 3 Month Bill ETF (TBIL) and Ultrashort Treasury Inflation-Protected Security ETF (RBIL) as mutual fund shares, Morris said.

The company is also broadening its product set, separate from the dual share class issue:

• Over the summer it launched a series of passive fixed-income funds with the goal of avoiding taxes associated with dividends.
• It recently filed for a line of investment-grade corporate bond ETFs with maturities ranging from six months to 30 years. It’s also prepping an “opportunistic income” ETF.

Against the Current: Most of the dozens of applicants seeking dual share classes are planning to extend their mutual fund strategies to ETFs, which makes sense, given the flows out of mutual funds and into ETFs broadly. F/m is among those going the other way. “The thing that might save the mutual fund, believe it or not, is the ETF,” Morris said. “That was supposed to kill it.”