Morgan Stanley's Parametric moves the wirehouse into ETF management

Less than two months after unveiling plans for a full-scale ETF platform, Morgan Stanley Investment Management is testing the waters of the ETF space through its asset management subsidiary, Parametric Portfolio Associates.

Parametric, which became part of Morgan Stanley when the wirehouse acquired Eaton Vance in March 2021, is listed as the subadviser of two exchange-traded funds filed with the Securities and Exchange Commission Friday morning.

The filings represent a move into the ETF space for both Morgan Stanley and Parametric, which has until now offered separately managed account and direct indexing strategies.

The filings list $7 billion asset manager Innovator ETFs as the sponsor and adviser, with Parametric subadvising the Innovator Equity Managed Floor ETF and the Innovator Technology Managed Floor ETF.

"Bringing Parametric’s scientific, systematic investing approach to the ETF wrapper for the first time is an honor, and we think advisers will find these equity managed floor strategies very compelling not just for their risk management components but as core portfolio solutions,” said Bruce Bond, Innovator’s chief executive.

The new strategies could be uniquely well-timed to a stock market that has settled into correction territory.

The Innovator Equity fund will hold mostly stocks representing the S&P 500 Index along with options to offer downside protection that would limit losses to 10%. The Innovator Technology fund will invest in stocks representing the Nasdaq Composite Index along with options offering the same downside protection.

The funds are not capping the upside, which distinguishes them from buffered strategies.

The fund expense ratios aren't listed in the filings, but by way of comparison, similar buffered strategies from Innovator are charging 79 basis points.

Nate Geraci, president of The ETF Store, described the filings as “fitting right into the Innovator approach.”

“A key challenge investors face right now is finding the proper balance between maintaining market exposure to capture potential upside, while mitigating against sharp declines,” he said. “These ETFs seek to solve that riddle by offering a floor on losses without capping the potential for positive returns. With market volatility on the rise and growing concerns around a slew of factors including valuations, inflation and geopolitics, these products fill a need for investors seeking a one-stop shop risk management solution for core equity exposure."

Eric Balchunas, ETF analyst at Bloomberg Intelligence, underscored the significance of Parametric migrating into ETF space from its SMA and direct indexing wheelhouse.

“I thought they would keep Parametric as their direct indexing provider,” he said, adding that the subadvisory role might be an acknowledgement by Morgan Stanley that direct indexing isn’t all it was cracked up to be.

“Direct indexing has been way overhyped, and I think the fact that Morgan Stanley is moving into ETFs and with the Parametric name is somewhat of an admission that Parametric wasn’t the end-all-and-be-all they thought it would be,” Balchunas said.

Morgan Stanley declined to comment for this story, and Parametric did not immediately respond to requests for comment.

A source familiar with the filing confirmed that Parametric’s subadvisory role doesn't represent a move away from SMAs or direct indexing, and that these ETFs are not part of the ETF platform Morgan Stanley announced in March.

But even as an indirect entrance into the ETF space, Balchunas said it is difficult to understate the significance and potential of the move.

“Maybe this is their baby-step way in, but this is a big fish because they’ve got a massive network of advisers,” he said. “Morgan Stanley is probably the last big holdout and one of the first wirehouses to get involved in ETFs. I reckon they will get as creative as they can to monetize their massive network.”

Balchunas also pointed out that while Morgan Stanley appears late to the ETF game in 2022, the wirehouse was actually a trailblazer in 1996 when it announced the third ETF ever launched, the World Equity Benchmark Series.

Within a few years, Morgan Stanley sold its ETF to Barclays for one dollar. The ETF was renamed iShares MSCI Emerging Markets ETF in 2000, and in 2008 it was sold to BlackRock, which is now the world’s largest asset manager.

“Mogran Stanley actually came up with the name ETF, and then they weren’t interested anymore,” Balchunas said, referring to the sale of the early ETF as “one of the biggest screwups ever in asset management.”