The latest ETF issuer to spring from a mutual fund provider in the US, is Touchstone Investments, a USD25 billion Cincinnati, Ohio-based investment company, formerly solely providing mutual funds and now with an offering of four ETFs.
Matt Barry, Vice President, Product Management & Head of Capital Markets at the firm explains that it distinguishes itself by offering active, high conviction strategies, all sub-advised by 14 sub-advisers, across all asset classes.
It distributes through intermediaries across the US, serving the RIA space as well as banks and bank trusts on its institutional channel, and has a retail channel offering to financial advisers at independent, regional broker/dealers and wirehouses. Across the US, the firm has 22 retail wholesalers.
Barry says: “We have been monitoring the ETF space over the years and everyone knows ETFs are a more widely accepted investment vehicle now.
“When we put a business case together in 2020, we could see that the ETF Rule had eased some of the friction and then there had been that acceleration of the trend to invest in ETFs. Historically, it had been driven by passive investments but we have seen ETFs coming into the active space.
“We thought that if we could provide our Distinctively Active strategies in an ETF wrapper with its lower costs and its tax efficiency – that was being responsive to the demands of our clients.”
The four new funds are Touchstone Strategic Income Opportunities ETF; Touchstone US Large Cap Focused ETF; Touchstone Dividend Select ETF and the Touchstone Ultra Short Income ETF, coming in the coming weeks, listed on NYSE and Cboe.
The four funds are sub-advised by a Touchstone affiliate firm, Fort Washington Investment Advisors. “It was operationally easier to partner with our affiliate and work out how we handle creations and redemptions and build out an ETF platform,” Barry says.
The process started some 18 months ago using a multi-functional internal group plus a consultant, ETP Resources, to tap external expertise as a point of leverage.
“One of the things that is most new to us, which we didn’t have before, is the Capital Markets group and the relationships with market makers, authorised participants and exchanges – that has been brand new to us.
“It’s been fascinating and one of my favourite parts of this endeavour,” Barry says. “We brought in a new hire to help with that and utilised our service providers who have made connections and helped us establish those relationships.”
Barry reports that the products are trading efficiently on their exchanges, with tight bid/offer spreads and the list of market makers and authorised participants who want to support them is growing.
“It’s an exciting part of the project,” Barry says.
The funds are similar to existing mutual funds, with the first of the four an actual clone of a an existing mutual fund. “We had to work with our distribution partners to figure out how best to structure the strategies,” he says.
“We worked with distribution partners, and we tried to find a sweet spot using Fort Washington’s demonstrated investment strength while tweaking the strategies where it makes sense to get the distribution partners more comfortable with having both a mutual fund and ETF.”
The firm also looked at the semi-transparent ETF structure in depth, with relationships with all the main providers.
“We thought we would launch one of our four as a semi-transparent ETF until late in the process but the portfolio manager got comfortable with the concept of transparency, which from our perspective worked out well in terms of saving costs, and access to platforms,” Barry says.
Going forward, there may yet be a semi-transparent ETF, with Barry saying they will consider it on a case by case basis.
“We have high hopes for our new ETF business,” Barry says. “It’s been a big endeavour and we are realistic. We don’t expect hundreds of millions to flow in on day one, we expect a bit of a build, but we have a lot of interest from our client base.”
Now Touchstone has the ETF platform, Barry says that they are in conversation with other existing sub-advisers and new third-party sub-advisers who might make candidates for future ETF launches, including ETFs with international investments.