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Capital Group's Fashionably Late Entry to the ETF Party

One of the world's largest asset managers makes a statement.

Securities In This Article
American Funds Growth Fund of Amer A

Capital Group, the parent of American Funds, expects to introduce its first suite of exchange-traded funds early next year. According to preliminary prospectus filings on Aug. 24, 2021, the firm will launch six actively managed, transparent ETFs in the latter half of 2022's first quarter: fixed-income strategy Capital Group Core Plus Income CGCP; U.S.-centric equity mandates Capital Group Growth CGGR, Capital Group Core Equity CGUS, and Capital Group Dividend Value CGDV; and international/global equity strategies Capital Group Global Growth Equity CGGO and Capital Group International Focus CGXU.

While other active management mutual fund giants like Fidelity and T. Rowe Price moved first, Capital Group will now bring its characteristic scale and low-cost leadership to bear on ETFs. Capital Group's immense size--the firm manages more than $2 trillion in assets--allows it to pass on lower expenses to investors. That has historically been the case on its American Funds mutual funds, and though the firm didn't announce expense ratios in the prospectus filing, it's fair to expect that its ETFs will have competitive fees, especially relative to actively managed mutual funds.

Capital's hallmark multimanager system is well-suited for the new vehicle. Like the American Funds, each ETF will split its asset base among managers plying unique styles in independent portfolio slices. The ETFs won't be share classes or exact clones of existing mutual funds, but their managers still will apply the processes in the new vehicles. They'll differentiate themselves from the legacy funds by changing up the mix of portfolio managers.

This approach can also help manage a drawback with ETFs. Unlike mutual funds, asset managers cannot close ETFs to new investors, raising liquidity and capacity concerns. Capital Group has rarely used fund closures to manage capacity, opting to spread assets over more independent managers instead. The firm will likely follow the same playbook on these ETFs.

Adding managers could make the ETFs look and act more like the actively managed mutual funds they seek to complement, but the firm is starting with more compact manager lineups for its ETFs. Capital Group Growth, for instance, will launch with six named managers, whereas American Funds Growth Fund of America AGTHX has 13. Four of the Growth ETF's six named managers--Mark Casey, Anne-Marie Peterson, Andraz Razen, and Alan Wilson--also work on the Growth Fund of America, so there likely will be overlap between the vehicles' portfolios.

Like the American Funds, the Capital Group ETFs also will have analyst-led research portfolios that gobble up a portion of assets. And while Capital's robust bottom-up capabilities are one of its key strengths, it also means that stock picks will bubble up from mostly the same analyst teams that support the American Funds.

Finally, the firm's decision to use the Capital Group name instead of its American Funds brand widely known in the United States reflects the firm's global ambitions with its ETFs. Its non-U.S. offerings mostly fly under the Capital Group banner.

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About the Author

Tom Nations

Director of Research and Content, Data, Direct & Reporting
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Tom Nations, CFP, is the Director of Research & Content, Morningstar Data, Direct & Reporting.

Before assuming his current role in 2021, Nations was a manager research analyst covering equity strategies, then an associate director of multi-asset and alternative strategies for Morningstar Research Services, LLC, a wholly owned subsidiary of Morningstar Inc. Prior to that, he spent more than five years working for a Chicago-based investment and financial advisory firm, conducting mutual fund and asset-class research to help build and review tailored asset allocations for high-net-worth and ultra-high-net-worth individuals and families.

Nations holds a bachelor's degree in business economics from Miami University's Farmer School of Business. He also holds the Certified Financial Planner™ designation.

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