By Matt Baskir

While total mutual fund assets under management still outnumber ETF assets by a few multiples, there has been a lot of attention on the relative growth of ETFs. ETFs may be more attractive to investors for a variety of reasons. Mutual funds and ETFs are similar in many ways, but do have some key differences, including: ETFs trade on exchanges at market price throughout the day like shares of stock; mutual funds are purchased/sold at NAV at the end of the day; and ETFs are generally more tax efficient and have lower expenses.

There has also been a lot of buzz in the industry regarding mutual fund-to-ETF conversions. Some factors to consider in a conversion include: SEC filings and protocol, shareholder notifications, necessity of having a brokerage account for ETF investors, share classes, and trading or market risk. The SEC has issued guidance directly to investors on such conversions.

Nottingham recently completed the first fund administrator-sponsored mutual fund-to-ETF conversion in a series trust, Starboard Investment Trust. This also represented the first ever multi-class mutual fund-to-ETF conversion. We would like to share some issues to consider if your firm is contemplating a conversion.

  • Is the conversion in the best interest of shareholders?
  • Will the conversion be a tax-free reorganization?
  • What is the primary shareholder base in the mutual fund (as an ETF may not be appropriate for all shareholders)?
  • Which entity will pay the reorganization fees and expenses related to the conversion?
  • Will there be a change in the fund’s investment strategy or portfolio management team?
  • Do fund managers understand the day-to-day differences in running an ETF, including working with authorized participants, creation/redemption units and standard/custom baskets?
  • Does the fund have experienced service providers, counsel, compliance professionals and auditors in place to shepherd the conversion?

Nottingham has the experience and expertise to guide you through the conversion process.

If you have any questions about mutual fund-to-ETF conversions, starting a fund or Advisers Act or 40 Act compliance, please don’t hesitate to reach out.