With $245 billion1 in record flows for U.S.-listed ETFs in Q1 2021, asset managers are looking for shortcuts to enter the market with assets and performance in tow. The ETF rule and SEC relief for active semi-transparent ETF structures have also prompted interest. Converting an existing structure, such as a mutual fund, to an ETF allows a firm to enter the marketplace with immediate scale and a track record.

Nashville, Tennessee-based Upholdings Funds LLC, a boutique hedge fund manager, made history by successfully converting its’ hedge fund to an actively managed ETF at the end of 20202. The $3 million tech-heavy portfolio converted to the Upholdings Compound Kings ETF (KNGS) in hopes of expanding its investor base. This conversion brings with it a potential advantage to investors as its expensive tech holdings may benefit from being reshuffled without triggering taxes.

On the heels of KNGS, Guinness Atkinson made history as it successfully converted two existing mutual funds to two actively managed ETFs, which began trading on the NYSE Arca under the firm’s SmartETFs brand on March 29, 20213. Guinness Atkinson had been in discussions around a conversion for quite some time, and the firm made this move more quickly with the launch of an ETF trust prior to conversion. That said, Dimensional Fund Advisors’ (“DFA”) announcement last year, that it plans to convert multiple mutual funds, is one that some managers are interested in seeing play out before making any conversions themselves. The DFA conversion comes with additional complexity brought by four funds, multiple share classes, an estimated $26 billion in assets under management4, and diversity of shareholders and intermediaries. Although the firm may be able to leverage a few best practices, around notifications and operations (such as intermediary points of contact and support of fractional shares), from the Guinness Atkinson conversion, it is important to highlight that any firm contemplating a conversion will have unique factors that will drive the process.

Although the future looks promising for those evaluating converting mutual funds to active ETFs, firms need to recognize the lengthy, complicated, and unique process ahead of them if they move forward. Foreside recommends consulting with your service providers on the process to take to convert, timeline, economics, approvals, etc. well in advanced of making any conversions.


1 https://www.etf.com/sections/monthly-etf-flows/etf-monthly-fund-flows-march-2021?nopaging=1

2 https://www.thinkadvisor.com/2021/01/07/small-hedge-fund-makes-history-by-turning-into-etf/



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