Having launched their first ETF just three years ago, Touchstone Investments is keeping firmly on the path of increasing the prominence of its ETF assets.
The firm has been in mutual funds for 20 years and has some USD30 billion in mutual funds with just USD830 million in ETFs, having converted some mutual funds and also launched new products.
This year has seen the launch of three new active ETFs, and now a filing to convert the Touchstone Large Company Growth fund (DSMLX), managed by DSM Capital for the firm for over a decade, into an ETF. The fund has USD170 million in it and is expected to become an ETF in the first quarter of next year. “Our mentality is to build out a robust ETF platform,” Matt Barry, head of capital markets, says.
“Because these are actively managed products, we generally expect very little asset growth in the first year or two as our ETFs incubate. Our clients are buying into in the belief of potential outperformance that they want to see come to fruition.”
Active ETFs have dominated flows this year with some USD245 billion year to date, one third of all ETF inflows, flowing into the strategy and Barry believes that the arrival of the ETF as a share class will also push the strength of active.
“Going back, active ETFs were a much smaller piece of the universe. Historically our clients have accessed their active strategies in the mutual fund vehicle and so there is a huge pool of assets out there. What we are seeing is that with the emergence of active ETFs, they are searching for those same types of strategies with the tax efficiency and lower cost profile of the ETF vehicle.”
The firm’s Ultra Short Income ETF (TUSI) has been proving popular and not just with the retired investor group, looking for income. “We have seen a lot of interest in the ultra-short income ETF because there is a lot of market uncertainty out there and using an ultra-short puts their cash to work while gathering incremental yield,” he says.
“It’s a real mix of investors, including younger clients with cash on hand who are looking to make it work while accepting a bit of price volatility.”
Barry predicts that industry product proliferation will continue as well as leveraged strategies and single stock ETFs.
“We are not playing in many of those esoteric categories because our model is focused on hiring the best in class institutional sub-advisers to manage our funds. A lot of the experimentation doesn’t fit with institutional calibre track records, so we stick with the basic building blocks across US equity, international equity, and fixed income.”
Barry has also seen renewed interest in the firm’s international offering. “The environment we have been in has been dominated by a handful of US mega-cap tech stocks from which investors haven’t benefited by diversifying.”
The Touchstone Dynamic International ETF is managed by Los Angeles Capital Management and invests primarily in equities of non-US companies domiciled in both developed and emerging markets using a dynamic factor-based approach.
“The team looks at investor preferences on a forward-looking basis and positions the portfolio around that, which has given it strong year to date performance in this macro environment,” Barry says.
Los Angeles Capital Management was hired about a year and a half ago to manage this ETF conversion that originally came out of a fund of funds that Touchstone had acquired but never scaled up.
“We made a decision to convert it into an ETF and hired Los Angeles Capital Management,” Barry says. “They have run that strategy for institutional clients for over a decade. The fund is invested in the rest of the world, ex US, including emerging markets at 20 to 30 per cent, but mostly in developed markets, using the MSCI All Country World Ex-U.S. Index as its benchmark. Our clients are pleased because they get the international exposure and benefits of the ETF vehicle.”
Selective conversions of mutual funds to ETFs will continue with the firm but in some cases the new, long-awaited ETF as a share class structure will work for them.
“Once SEC exemptive relief is granted, which could happen late this year, there will be a lot of operational work to get done, including building the infrastructure, so potentially we will be launching ETFs as a share class by late 2026.”
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