Morgan Stanley Converts Mutual Funds into First ‘Pathway’ ETFs

Morgan Stanley is charting a new path forward with its latest funds.

The New York-based investment bank announced it is converting two of its mutual funds with a combined $3 billion in assets into its first exchange-traded funds under the “Morgan Stanley Pathway” banner, according to a filing with the Securities and Exchange Commission.

The $2.5 billion Pathway Large Cap Equity Fund and $453 million Pathway Small-Mid Cap Equity Fund will be reorganized into ETFs that are expected to begin trading on the New York Stock Exchange in November.

Mutual Friends

Morgan Stanley Pathway was built on offering attractive mutual funds, so transforming two of its portfolios into ETFs is definitely a shake-up for the brand. However, the bank’s board unanimously approved the reorganization, calling it “an attractive opportunity for asset growth” and citing trading flexibility, increased transparency, and enhanced tax efficiencies for the conversion. Portfolio managers will stay the same once the conversion happens: 

• The large cap fund has recorded net inflows of $335 million in the past year, while the small-mid cap fund has suffered outflows of $78 million, according to YCharts. 
• In addition to the two soon-to-be ETFs, Pathway contains nine other funds, including the $162 million Alternative Strategies Fund and the $1.3 billion International Equity Fund.

ETFs In, Mutual Funds Out: Morgan Stanley first started playing the ETF field in February 2023 when it launched six under the Calvert brand. Later that year, it filed for its first mutual fund-to-ETF conversion. The firm currently oversees 15 ETFs.

This February, Morgan Stanley took a page out of Vanguard’s book, filing for an ETF multi-share class structure, which would allow the firm to offer ETF share classes of its mutual funds. It’s a strategy the likes of Dimensional, Fidelity, Cboe Global Markets, and more have been looking to adopt, too.