Morgan Stanley’s much-anticipated migration into the ETF space is banking on the appeal of ESG strategies by leveraging the Calvert brand and pairing it with low fees.
A recent Morgan Stanley filing, which comes 10 months after the $1.5 trillion investment manager unveiled plans to launch a full-scale exchange-traded fund platform, illustrates a focus on low fees for four index ETFs and two active ETFs under the Calvert label, which Morgan Stanley owns as part of its 2021 acquisition of Eaton Vance.
The four index ETFs, which will offer various mid- and large-cap equity exposure, as well as exposure to international equities, each have fees below 20 basis points, which is less than their Calvert mutual fund counterparts.
“I think they were smart to go cheap, because that’s the only way Morgan Stanley would have a fighting chance in the ETF market,” said Eric Balchunas, ETF analyst at Bloomberg Intelligence.
While Morgan Stanley has the potential momentum of 20,000 reps advising on more than $4 trillion in client assets, Balchunas said, “They can’t afford for their ETF launch to be a flop.”
The low fees, he added, suggests Morgan Stanley is heading in the right direction by “meeting the ETF market on its own terms” and not just focusing on the revenue from that business.
Balchunas cited the Fidelity Magellan ETF (FMAG) as an example of how a mutual fund complex can misstep in the ETF space when it comes to fees.
The Magellan ETF, charging 59 basis points, was launched two years ago as the ETF version of the $23 billion Fidelity Magellan Mutual Fund (FMAGX).
Balchunas said the fees on the Magellan ETF have been a deterrent for fee-conscious investors and is the reason the fund has attracted just $41 million.
“That’s something that might have worked in the ‘90s,” he said. “But that fund should have been priced at 15 basis points to have a chance.”
Morgan Stanley wasn't able to comment for this story, but Balchunas said its ETF business will do better by following the lead of the JPMorgan Equity Premium Income ETF (JEPI), which charges 35 basis points and led all ETFs last year with $12 billion worth of inflows.
Like the Magellan ETF, JEPI is an ETF version of an existing mutual fund. But at JPMorgan, the strategy was to go cheap, pricing the ETF below the lowest-cost mutual fund version, which charges 61 basis points.
“That’s the kind of Mad Max thinking you need to compete in the ETF space,” Balchunas said. “Traditionally, a big mutual fund company that launches an ETF would price it between retail and institutional, but they went below the institutional share price.”
While Morgan Stanley appears to have figured out the fees, it remains to be seen if the firm is striking the right chord by going the ESG route with its ETF launch.
Todd Rosenbluth, director of research at VettaFi, expects Morgan Stanley’s ETFs to hit the market in early February to coincide with the ETF Exchange conference in Miami, where Morgan Stanley is a presenter and sponsor.
“Morgan Stanley is tapping into one of their strong brands with Calvert, which is a well-respected and widely utilized asset manager for ESG-minded investors,” Rosenbluth said. “Advisors are still in the early days of providing clients with an ESG version of their asset allocation models, Morgan Stanley follows in the footsteps of Capital Group, DoubleLine and Neuberger Berman to bring some of their best ideas into the ETF space in a low-cost manner to provide advisors with the choice between mutual funds and ETFs.”
While Calvert stood out as the only member of Morgan Stanley's mutual fund lineup that didn't lose assets last year, Balchunas said the ESG angle might not be the fastest track toward asset growth for ETFs.
“These ETFs would have made more sense five years ago,” he said. “With 226 ESG ETFs, it’s a crowded space right now.”
Even with more ESG ETFs to choose from and increased media coverage, ESG ETFs took in just $3 billion last year, which is equal to 0.5% of all ETF flows. And during the first three weeks of 2023, ESG ETFs saw nearly $1 billion worth of outflows, Balchunas said.
While Balchunas said he “doesn’t love” the ESG-focused ETF debut, he described Morgan Stanley’s move into the ETF space as “one of my top five things to watch this year.”
“They’ve got $4.1 trillion managed by around 20,000 advisors — talk about being born on third base as an ETF issuer,” he said. “There’s so many things we’re going to find out with this ETF launch about captive markets, fees and ESG.”
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