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Active ETFs vs. Active Mutual Funds: What Is the Big Revolution?

The recent rise of exchange-traded funds (ETFs), particularly active ETFs, has become a popular vehicle for investors. While initially associated with passive investing, offering investors market index exposure at low costs, the emergence of active ETFs represents a blend of active management strategies within the ETF structure.

Active ETFs are rapidly growing in terms of assets under management (AUM), creating competition with established active mutual funds in the investment world. This article explores the concept of active ETFs, highlighting their advantages, disadvantages, and key differences from active mutual funds, to provide a comprehensive perspective on their role in investment portfolios.

Definition and Growth of Active ETFs

Active ETFs are a relatively recent innovation in the ETF market. Unlike passive ETFs, which track a benchmark index such as the S&P 500, active ETFs allow portfolio managers to actively select and manage a basket of securities in real time.

The goal is to outperform a benchmark index or achieve a specific investment objective rather than simply replicating market index returns. The flexibility of active ETFs enables managers to make adjustments based on market conditions or specific security information, similar to active mutual funds.

The growth of the active ETF market has been remarkable. According to data from TrackInsight and PwC, active ETFs have grown at a compound annual growth rate (CAGR) of 51% over the past decade, significantly outpacing passive ETFs in terms of capital inflows.

Advantages of Active ETFs

Lower Costs Compared to Active Mutual Funds: One of the main advantages of active ETFs over active mutual funds is their lower cost ratio. Mutual funds often have management fees, 12b-1 fees, and other operational costs, while active ETFs offer lower overall costs to investors. According to JPMorgan research, this cost advantage is a key driver of active ETF popularity.
Trading Flexibility: Active ETFs offer significant flexibility in trading. Unlike mutual funds, which are priced at the end of the trading day, ETFs trade on an exchange throughout the day, like stocks. This allows investors to react to market events in real-time, entering or exiting positions based on intraday price movements.
Tax Efficiency: Active ETFs tend to be more tax-efficient than mutual funds due to their unique structure and the in-kind creation and redemption process. This process allows ETFs to avoid selling securities to meet redemption requests, often triggering capital gains taxes in mutual funds.
Transparency: Most active ETFs are required to disclose their holdings daily, providing investors with full transparency into the fund’s portfolio. This level of transparency surpasses that of traditional active mutual funds, which typically disclose their holdings quarterly.

Disadvantages of Active ETFs

Potential for Underperformance: Despite their flexibility and the potential for active management to outperform the market, active ETFs, like any actively managed product, carry the risk of underperformance. Fund managers may fail to generate alpha, particularly in volatile or highly efficient markets.
Higher Costs than Passive ETFs: While active ETFs are generally more cost-effective than active mutual funds, they tend to have higher costs than passive ETFs. This is because active management requires more research, operations, and oversight.
Limited History and Fewer Options: Compared to mutual funds and passive ETFs, the active ETF market is still relatively young. While there are now hundreds of active ETFs, they represent a small fraction of the broader ETF universe, and their track record of returns is significantly shorter than that of mutual funds.
Due Diligence: Selecting a passive ETF requires a certain level of analysis to understand the tracking method used to replicate exposure to its respective index; however, the objective is relatively simple: a good replication technique seeks to minimize tracking error and reproduce the index’s performance.

For active ETFs, the objective is different: like active mutual funds, their goal is generally to outperform the benchmark, which involves a degree of tracking error (TE) and active participation, requiring investors to attain a high level of understanding of the algorithm behind it, its strengths, and, most importantly, its weaknesses.

In the following chart, the Tracking Error (TE) is shown for a sample of 195 active ETFs domiciled in the U.S., organized by strategy (market capitalization, factors, thematic, and sector), with a clear differentiation in terms of active participation and TE: the majority of active ETFs referencing market capitalization were at the lower end of the TE spectrum (some below 2%).

Most factor-referenced ETFs had a TE in the 2% to 8% range. Thematic-referenced active ETFs showed the highest TEs. The generally high TE level of these active ETFs suggests that they provided active risk beyond their key investment style.

An additional consideration to keep in mind is the distribution of both product types (funds and active ETFs). Unlike mutual funds, active ETFs do not require a distribution agreement, reducing the time and cost from discovery to implementation in portfolios and generally do not provide kickbacks to advisors who use them. This can have indirect implications depending on the type of license the distributor chooses.

For U.S. Registered Investment Advisors (RIAs), assuming no advantages in risk-adjusted returns between comparable active ETFs and mutual funds, active ETFs may be preferred over mutual funds if they present lower management fees. This is due to the fact that compensation for managing clients’ portfolios under an RIA license is typically based on a percentage of assets under management (AUM) and additional fees or commissions, including kickbacks, cannot be charged. In contrast, under a brokerage model in the U.S., mutual fund formats may be preferred as this license allows for transaction-based commissions and kickbacks.

For non-resident clients (NRCs) in the U.S., unlike passive ETFs that may have dual registration and listing on different exchanges (e.g., Nasdaq and SIC), active ETFs currently do not permit dual registration, eliminating a key tax advantage compared to passive vehicles.

Smart Beta vs. Active Management: Key Differences

While active ETFs represent the intersection of traditional active management and the benefits of ETFs, smart beta strategies offer a hybrid approach distinct from both passive index tracking and full active management. Smart beta ETFs aim to capture the benefits of factor-based investing, targeting specific investment factors such as value, momentum, size, or quality.

These strategies seek to enhance returns or reduce risk by adjusting portfolio weights based on certain rules or criteria, rather than relying on typical market-cap weighting used by passive ETFs.

Rule-Based Approach vs. Manager Discretion

One of the main distinctions between smart beta and active management is the degree of human discretion involved. Smart beta strategies are typically rules-based, following a predetermined methodology that selects and weights securities based on factors such as volatility or dividend yield. While these strategies offer the potential for higher returns than traditional passive indices, they are not managed actively in the same way as active ETFs, where managers make discretionary decisions on what securities to buy or sell based on market conditions.

Cost Structure

Smart beta ETFs tend to be more cost-efficient than fully active ETFs, as they do not require the same level of active research, trading, and portfolio turnover. However, they are often more expensive than purely passive ETFs due to their sophisticated portfolio construction and factor analysis. In contrast, active ETFs generally have higher fees due to the need for ongoing management and oversight.

Transparency

Smart beta ETFs are highly transparent, as they follow a consistent set of rules for portfolio construction, making their positions and strategy predictable. Investors can easily understand the factors driving performance. On the other hand, active ETFs are less predictable, as the portfolio manager has the discretion to frequently change positions based on market conditions.

Potential to Outperform the Benchmark

Both smart beta and active ETFs aim to outperform a benchmark index, but their approaches differ. Smart beta strategies rely on biases toward certain factors to achieve higher returns, while active ETFs depend on the skill and judgment of the manager.

The potential for benchmark outperformance in active ETFs is greater if the manager can consistently identify undervalued assets or anticipate market trends. However, smart beta strategies offer a more systematic and disciplined approach to capturing excess returns.

Conclusion

Active ETFs and smart beta strategies offer innovative alternatives to both passive ETFs and traditional active mutual funds. Active ETFs provide the benefits of active management, liquidity, and tax efficiency, making them an attractive option for investors seeking flexibility and potential outperformance. However, they also come with higher costs and the risk of underperformance. On the other hand, smart beta represents a middle ground between active and passive investing, offering a rules-based approach targeting specific investment factors, while remaining more cost-effective than full active management.

When deciding between active ETFs, smart beta, and active mutual funds, investors should carefully consider their investment goals, risk tolerance, and preferences regarding costs, transparency, and flexibility. Each vehicle has its unique advantages and limitations, but the rise of active ETFs and smart beta strategies reflects the growing demand for customized and cost-effective investment solutions in today’s dynamic market environment.

Brazil, Mexico, Argentina, Chile, and Global Markets: Initial Reactions to Trump’s Victory

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As dictated by the unpredictability of these times, the U.S. elections had an outcome that almost no one expected: a clear victory for one party and an elected president within 24 hours of voting. The U.S. stock market and Bitcoin surged, while Latin American currencies and the price of gold fell.

Republican Donald Trump will be the President of the United States for the second time. For the new term, analysts anticipate tax cuts (as per the campaign promise), an increase in the public deficit (a consequence of the former), a likely rise in inflation, higher interest rates, and, if Trump’s proposed tariff increases are enacted, greater protectionism.

In Latin America, the main impact of Trump’s victory would be a dollar appreciation and the resulting devaluation of local currencies.

Mexico, the country that could be most affected

Mexico’s President Claudia Sheinbaum congratulated the U.S. President-elect and sent a reassuring message to her fellow citizens: “There is no reason for concern… there will be a good relationship.”

The Mexican Stock Exchange (BMV), which initially opened with a sharp negative adjustment of 2.65%, breaching the 50,000-point support level, has recovered and by the afternoon was trading near the previous close (down 0.03%, standing at 50,816 points); meanwhile, the peso stood at 20.25 units per dollar. Analysts attribute the recovery in Mexican markets, in part, to Wall Street’s momentum.

During his campaign, Trump promised to impose tariffs ranging from 25% to 100% to pressure the Mexican government to curb migration and drug flow across the border. “If this threat materializes, it would severely impact Mexico’s exports, investment in the country, job creation, and economic growth,” said Gabriela Siller Pagaza, Head of Analysis at Banco Base, in a morning report to clients.

“However, it’s important to remember that Trump doesn’t always follow through on his threats, and the market knows this. Therefore, the peso’s depreciation the day after the elections (2.59%) is less than what was seen when he won his first term (8.30% in 2016). This suggests that the market sees risks but considers these threats as part of his negotiation strategy, which he may not necessarily fulfill to the letter,” the expert added.

In Brazil, the Ibovespa drops, and Google toys with investor nerves

The re-election of Donald Trump triggered an immediate 1.3% drop in the Ibovespa, Brazil’s main stock index, although by Wednesday afternoon, losses had moderated to 0.65%.

According to Bradesco, Trump’s victory and the expectation of higher global interest rates add uncertainty to Brazilian public debt and put pressure on the real. “This is why the fiscal adjustment package becomes even more important,” explains Fernando Honorato, Chief Economist at Bradesco.

Despite the initial reaction of the stock market, the dollar rose by 0.5%, reaching 5.78 reais. However, many Brazilians were misled by an incorrect exchange rate on Google, which showed the dollar rising to 6.19 reais.

This rate would have been a historic high if not for one detail: Google, which relies on data from Morningstar, showed an incorrect figure for several hours before correcting it. The tech company later informed the press that the cause of the error was unknown.

Timing is everything, and Trump’s re-election coincides with a critical day for the Brazilian market, as the government prepares to unveil a new spending cut program. Market reactions could intensify if the proposal fails to meet investors’ expectations. The government aims to reach a zero deficit next year.

Lula’s criticism of Trump ages poorly. The Brazilian President, previously known for his diplomatic pragmatism, quickly congratulated the U.S. President-elect, praising his victory.

“Democracy is the voice of the people and must always be respected. The world needs dialogue and joint efforts to achieve more peace, development, and prosperity,” said Lula, who recently compared Trump to a Nazi and publicly supported Kamala Harris in recent weeks.

Milei, exultant

Argentine President Javier Milei has always been direct in his support for Trump and expressed satisfaction with the Republican’s victory. Argentina is outside the international financial system, and the electoral change’s consequences could involve greater openness from the IMF in ongoing debt negotiations.

“For Argentina, the immediate impact should be marginal, given that government policy will remain unchanged. Dollar-denominated bond prices should be dragged down somewhat by high-yield, where we should see downward pressure, but they may benefit from the perception of a ‘Trump trade.’ A weaker currency and lower commodity prices are slightly negative factors, but the impact so far has been mild, and bonds should be more than offset by Milei’s affinity with President-elect Trump, which could be useful in future negotiations with the IMF, increasing the chances of more support,” states Max Capital in its daily analysis.

Javier Timerman, Managing Partner of Adcap Grupo Financiero, stated, “Donald Trump’s policies are not favorable for Argentina because they focus on protectionism, tax cuts, and the worsening of the fiscal deficit, which will lead to higher interest rates because the Federal Reserve will become much more restrictive regarding the possibility of an overheated economy and the return of inflation. In a high-interest rate and protectionist scenario, we will see a rise in the dollar globally, a drop in commodities due to the rising dollar, and that will affect Argentina.”

“On the positive side, we could say that the Trump-Milei relationship may unlock some type of disbursement, but it is also necessary to consider that the U.S. will likely contribute less to multilateralism, and surely the multilateral organizations from which Argentina needs funding will be underfunded,” added Timerman.

Chilean stock market rises

The Trump effect was felt in financial markets from the session’s early hours. The dollar jumped initially, climbing over 20 pesos—equivalent to a more than 2% appreciation compared to the previous close— reaching over 976 pesos, although the effect moderated as the hours passed. Still, the exchange rate closed the day at 960 pesos per dollar, representing a daily increase of 0.4%.

The local stock market also rose. Although the first few minutes of trading on the Santiago Stock Exchange saw a slight drop, the S&P IPSA benchmark closed with a 0.83% expansion, echoing global market growth and reaching near 6,580 points.

Among the most traded stocks of the day, LATAM Airlines rose by 1.7% and Cencosud by 1.5%, along with advances in Bci, Banco de Chile, and Santander, which climbed by 2.2%, 2.1%, and 1.8%, respectively. The largest gains, however, were in international platform shares, led by double-digit jumps in Wells Fargo and Bank of America, as well as in ETFs like Kraneshares’ CSI China Internet and iShares Bitcoin Trust.

General market notes

This Wednesday, the Dow Jones saw its largest gain in two years, reflecting enthusiasm for both Trump’s victory and the rapid resolution of the electoral contest.

One of the initial market shocks was the drop in gold, the asset that, globally, had dominated gains in 2024: “Gold sharply declined following Trump’s victory in the United States, which caused the dollar to soar. Remember that the dollar and gold typically have an inverse correlation, putting pressure on gold. At the same time, political uncertainty eases somewhat now that we know who the next U.S. president will be, reducing the appeal of gold as a safe-haven asset,” said Alexander Londoño, Market Analyst at ActivTrades.

Bitcoin’s all-time high: “As the preliminary results pointed to Donald Trump as the winner of the U.S. presidential election in the early hours of November 5, Bitcoin, the undisputed benchmark of the global crypto market, reached a new all-time high, surpassing $75,350,” according to the firm Bitso.

According to the New York Times, crypto companies supported Trump with about $130 million in campaign donations: “It paid off,” says the newspaper.

One of the big winners on election day was Elon Musk, one of Donald Trump’s most prominent supporters. On Wednesday, Tesla’s stock surged by up to 15%.

EBW Capital and AIS Financial Group Sign a Strategic Alliance for Latin America and US Offshore

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EBW Capital and AIS Financial form strategic alliance

EBW Capital, a London-based placement agent, and AIS Financial Group, an independent private boutique with offices in Latin America and Central America, have signed a strategic cooperation agreement to enhance their presence with investors in Latin America.

The agreement will focus primarily on investors from Uruguay, Argentina, Chile, Panama, and US Offshore, according to information accessed by Funds Society.

“We are delighted to have signed this strategic partnership with EBW, helping to further extend their reach into Latin America. We are confident that the region will turn towards these assets in the near future, and with our vast network of clients and EBW’s extensive experience in alternatives, we believe this partnership combines the best of both worlds for our investors: excellent service and the most attractive range of products,” commented Juan Ballester Molina, Director of Funds at AIS Financial Group.

EBW Capital works with leading global asset managers covering institutional investors in Latin America, with a focus on the real estate and credit sectors.

“We are excited to have the opportunity to collaborate with AIS Financial Group and look forward to jointly expanding our footprint in Latin America and US Offshore,” commented Frank Pauls, Senior Partner at EBW.

Monogamy Prevails in the Relationships Between Clients and Advisors, but There Are Also Third Parties Causing Discord

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Monogamy in client-advisor relationships

Breaking up with a financial advisor can be difficult for many investors, much like ending a relationship, despite the fact that legally making this change is straightforward and often facilitated by the new advisor.

The fear or intimidation surrounding the prospect of a change, along with uncertainty about whether better options exist, are key factors fueling “investor inertia,” concludes the research by Dynasty Connect shared by the financial advisory network.

The annual survey of high-net-worth investor sentiment was conducted with 1,000 investors who currently work with financial advisors, each with a minimum of $500,000 in assets under management.

Of those interviewed between July 5 and July 15, 2024, 29% began working with their financial advisors within the past four years, and 27% within the past nine.

However, just over half (52%) of respondents have only ever worked with one advisor, 25% have voluntarily changed advisors once, and only 17% have done so twice.

While the main reasons for changing advisors are no surprise—such as investment performance, the advisor’s retirement, or company relocation—it is noteworthy that 30% of respondents cited “meeting a new advisor who impressed them more” as inspiration to start anew.

Personality, fit, fees and fee structure, and lack of contact with their advisor were other key drivers for change, the study adds.

“The majority of people have worked with one or two financial advisors at most, making it difficult to know when to switch,” said Tim Oden, Chief Growth Officer at Dynasty Financial Partners.

Oden added that if investors “are not receiving the attention or results they expected, they owe it to themselves and their family’s future to seriously consider other options.”

Overall, the Dynasty Connect survey revealed that younger clients and those with fewer investable assets are more likely to change advisors.

Relationships Need Care Like Plants

In general, 59% of respondents cite an advisor’s ability to understand their specific needs as key to finding a suitable one, while a relationship breakdown is often due to disappointment in performance or service.

Methods for changing financial advisors reflect generational and technological shifts. Younger investors are more likely to consult databases and online search tools, while older clients often rely on referrals from other investors.

Are You Ready for a Relationship?

While 45% of respondents cite tax planning as a service offered by their financial advisor, only 28% value that feature. The survey illustrates that inconsistencies in valued services mean personalized offerings are key to the long-term success of the client-advisor relationship.

The vast majority of Dynasty Connect Survey respondents value financial planning above all, while the importance of other aspects of their client/advisor relationship depends on their unique needs or circumstances.

Sometimes Being Single Can Be an Option

Overall, surveyed investors expressed confidence that their advisors could support them through key life transitions; however, the rating of “great confidence” decreased in portfolio structuring and market events.

48% of respondents mention potential conflicts of interest due to the advisor’s firm earning money directly from the investment products in which their money is invested. According to the results, younger clients are more likely to distinguish potential conflicts of interest.

Finally, the relationship with children can be more challenging. 41% of respondents’ adult children do not work with their financial advisor, and 34% are likely not to do so in the future.

“The multigenerational opportunity is evident; however, adult children are clearly hesitant to work with the same advisor as their parents,” the research report concludes.

Dynasty Connect is an outsourced front office and growth engine for firms in the Dynasty network, dedicated to supporting their organic and inorganic growth efforts by identifying, qualifying, nurturing, and referring high-quality leads, both end clients and advisors interested in joining firms in the Dynasty network, according to company information.

JP Morgan AM Launches the UCITS Version of Two of Its Active ETFs from the Equity Premium Income Range

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J.P. Morgan launches UCITS version of ETFs

JP Morgan Asset Management brings to the European market two of the top-performing active ETFs in the North American market. Specifically, these are the JPMorgan US Equity Premium Income Active UCITS ETF and JPMorgan Nasdaq Equity Premium Income Active UCITS ETF, which are part of their actively managed Equity Premium Income ETF range in UCITS form. The asset manager has announced that both vehicles have begun trading on the London Stock Exchange.

Additionally, they note that these two active ETF strategies come on the heels of strong demand from U.S. investors since their launch in the U.S. “Specifically, as of October 24, the JPMorgan US Equity Premium Income Active ETF is the largest actively managed ETF in the world, with $36.6 billion in assets under management; and the JPMorgan Nasdaq Equity Premium Income Active ETF, with $17.6 billion under management, is one of the fastest-growing active ETFs in the U.S.,” they highlight.

By launching the UCITS version of these funds, the JPMAM Equity Premium Income UCITS ETF range now consists of three funds: the JPMorgan Global Equity Premium Income Active UCITS ETF, launched in December 2023, and the two newly listed in Europe. “Each ETF aims to offer investors consistent monthly income and the potential for equity market appreciation, with lower volatility, by combining active equity portfolios with options,” the asset manager adds.

Regarding these funds, the manager explains that both leverage a fundamental bottom-up analysis process to build higher-quality, lower-beta equity portfolios relative to their respective benchmark indices—the MSCI World in the case of the first fund, and the S&P 500 in the case of the second. The Nasdaq Equity Premium Income Active ETF utilizes a proprietary process based on more than 40 years of accumulated experience and data by J.P. Morgan, creating a portfolio fundamentally linked to the Nasdaq 100.

Each ETF applies an index options strategy, where the investment team, led by Hamilton Reiner, sells weekly options on the index, using the premiums to generate income. The premiums received from these option sales are distributed monthly, along with the dividends received from the underlying equities included in each ETF.

According to the asset manager, this process results in an Equity Premium Income range of income ETFs, designed to reduce downside exposure by giving up some future market upside participation in exchange for current income. By selling options weekly, the ETFs can adapt to changing market conditions. For example, when volatility increases, each ETF has the potential to provide higher income, offering investors protection against price fluctuations.

“We are delighted to expand our Equity Premium Income UCITS range with the launch of JEPI and JEPQ. These innovative and market-leading strategies, which have been in high demand in the U.S., offer investors an attractive solution to achieve their income and total return goals with reduced volatility. Over the past five years, we have worked closely with investors to build stronger portfolios with Equity Premium Income strategies, and we are pleased to now share this expertise and these unique solutions with our clients who require these vehicles in UCITS form,” says Travis Spence, Global Head of ETFs at J.P. Morgan Asset Management.

The SEC Fines J.P. Morgan Subsidiaries for Compliance Irregularities

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The SEC filed charges against J.P. Morgan Securities (JPMS) and J.P. Morgan Investment Management (JPMIM), both affiliates of J.P. Morgan Chase & Co. (J.P. Morgan), in five separate enforcement actions for noncompliance, including misleading disclosures to investors, breach of fiduciary duty, prohibited joint transactions, principal trades, and failures to recommend in the best interest of clients, according to the regulator’s statement.

“Without admitting or denying the findings in the SEC orders, both subsidiaries agreed to pay more than $151 million in combined civil penalties and voluntary payments to investors to resolve four of the actions. The SEC did not impose a penalty in one of the actions against JPMS, as it cooperated in the investigation and implemented corrective measures,” the statement says.

Action on Private Conduit Funds (JPMS)

The SEC order finds that JPMS made misleading disclosures to brokerage clients who invested in its “Conduit” private fund products, which pooled client funds and invested in private equity or hedge funds that later distributed shares of companies that went public to the Conduit private funds.

The order determined that, contrary to disclosures, a J.P. Morgan affiliate exercised full discretion over when and how many shares to sell. “As a result, investors were exposed to market risk, and the value of certain shares significantly declined while J.P. Morgan delayed selling them,” the SEC explains.

As part of resolving this enforcement action, JPMS agreed to make a voluntary payment of $90 million to more than 1,500 Conduit investor accounts and to pay a $10 million civil penalty, which will also be distributed to Conduit investors.

In addition to imposing the civil penalty, the SEC order states that JPMS violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and orders a cease-and-desist and a censure. The order notes that JPMS, through its attorneys, self-reported to SEC staff that certain investors had complained due to delays in selling certain shares.

Action on the Portfolio Management Program (JPMS)

The SEC order concludes that between July 2017 and October 2024, JPMS failed to fully and fairly disclose the financial incentive that both JPMS and some of its financial advisors had when recommending the JPMS Portfolio Management Program over third-party advisory programs offered by JPMS.

The SEC states that during the relevant period, assets under management in program strategies grew from approximately $10.5 billion to more than $30 billion.

“The SEC order finds that JPMS violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, imposing a cease-and-desist, censure, and a $45 million penalty,” the statement says.

Action on Cloned Mutual Funds (JPMS)

The SEC order finds that between June 2020 and July 2022, JPMS recommended certain mutual fund products, called Cloned Mutual Funds, to its retail brokerage clients, even though significantly less expensive ETFs offering the same investment portfolios were available. According to the order, when recommending Cloned Mutual Funds, JPMS and its registered representatives did not consider these cost differences or have a reasonable basis to believe that their recommendations were in clients’ best interest. The order states that approximately 10,500 clients made about 17,500 purchases of Cloned Mutual Funds during this period based on JPMS‘s recommendations.

The SEC order finds that JPMS violated Regulation Best Interest and imposes a cease-and-desist and censure. However, no civil penalty was imposed because JPMS promptly self-reported the issue to SEC staff, conducted an internal investigation, cooperated extensively, and, among other corrective measures, voluntarily reimbursed approximately $15.2 million to affected clients.

Action on Joint Transactions (JPMIM)

The SEC order states that in March 2020, JPMIM caused $4.3 billion in prohibited joint transactions, benefiting a foreign money fund affiliate for which it acted as a delegated portfolio manager instead of the three U.S. money market mutual funds it advised.

“The SEC order finds that JPMIM caused violations of Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder and imposes a cease-and-desist and a $5 million civil penalty,” the statement adds.

Action on Principal Trades (JPMIM)

The SEC order finds that between July 2019 and March 2021, JPMIM executed or caused 65 prohibited principal trades with a combined notional value of approximately $8.2 billion. Principal trades are generally prohibited to prevent undisclosed conflicts of interest unless certain conditions are met or the SEC grants an exemption. The order states that to conduct these trades, a JPMIM portfolio manager instructed an unaffiliated broker-dealer to purchase commercial paper or short-term fixed-income securities from JPMS, which JPMIM then purchased on behalf of one of its clients.

Fidelity Expands Its Range of Actively Managed Sustainable ETFs With Two New Fixed-Income Funds

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Fidelity amplía su gama de ETFs sostenibles

The actively managed ETF market continues to experience strong growth. The assets managed by these products have grown by 50% so far this year, totaling nearly €50 billion in the region. In response to increasing demand, Fidelity International (Fidelity) has expanded its range of actively managed sustainable ETFs with the launch of two new fixed-income ETFs.

According to the asset manager, these funds are the Fidelity Sustainable EUR High Yield Bond Paris-Aligned Multifactor UCITS ETF and the Fidelity Sustainable USD High Yield Paris-Aligned Multifactor UCITS ETF. Both have begun trading on Xetra and will soon be listed on the London Stock Exchange, SIX, and Borsa Italiana. These new vehicles complement the Fidelity UCITS II ICAV – Fidelity Sustainable Global High Yield Bond Paris-Aligned Multifactor UCITS ETF, launched in November 2022, which already holds $800 million in assets. Additionally, both ETFs are classified under Article 9 of the Sustainable Finance Disclosure Regulation (SFDR).

Supported by Fidelity’s quantitative, fundamental, and sustainability analysis, these funds invest primarily in a portfolio of high-yield, lower-credit-quality (sub-investment-grade) corporate debt from global issuers. Their objective is to generate income and capital appreciation, aligning with the long-term goals of the Paris Agreement by limiting carbon emissions exposure within their respective portfolios, according to Fidelity.

The funds are structured and adjusted using Fidelity’s proprietary multifactor model, based on its extensive quantitative analysis of fixed-income and data. According to the asset manager, this model aims to systematically generate alpha throughout the market cycle while preserving the essential characteristics of the asset class. It is designed to achieve superior returns by investing based on quantitative signals (factors) to identify outstanding issuers, while applying strict considerations regarding transaction costs.

On the occasion of the launch, Alastair Baillie Strong, head of ETFs at Fidelity International, stated, “By leveraging Fidelity’s extensive research resources and internally developed investment insights, we can offer our clients a range of actively managed ETFs with unique positioning that provides enhanced exposures compared to products that simply replicate indices, all at an attractive price. Since their launch in 2021, our sustainable ETFs have been well received by clients and have accumulated over $5.7 billion in assets across 13 different active strategies to date.”

Singular AM Completes Its Fixed Income Offering With Two Debt ETFs

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In its sixth year, the specialized asset manager Singular Asset Management has had a very eventful 2024. This includes one of the business lines the firm is best known for: ETFs, where they launched two new indexed strategies, completing their fixed income range.

These new vehicles, created in recent months, are the Chile Long Term and Short Duration Dollar strategies, with which the firm aims to consolidate the ETF as an investment vehicle. With this, their lineup of indexed vehicles now totals eight strategies, with five ETFs dedicated to debt assets.

The launch of Chile Long Term—focused mainly on Chilean bank bonds—aims to complete the curve of UF-denominated instruments, giving investors the option to access an intermediate duration, as stated by Singular AM in a conversation with Funds Society.

While the Chile Corporate ETF—one of the first indexed strategies launched by the Chilean manager—has an average duration of 2.3 years, the Chile Long Term vehicle has an average duration of around 5.8 years.

This, according to the firm, allows investors to use this instrument to access longer segments on the curve. Additionally, it complements the Chile Corporate investment for those with intermediate benchmarks, around 4 years. By combining both ETFs, they emphasize, investors can achieve the desired duration.

On the other hand, the launch of the Short Duration Dollar fund echoes the positive results they have seen with their Chile Short Duration strategy. This strategy has found a relevant niche in companies’ cash management due to its liquidity, but they previously lacked a hard currency alternative.

Therefore, following investor demand, they launched an ETF that invests in time deposits of Chilean banks in dollars.

With these two vehicles—anchored to RiskAmerica indexes—Singular AM aims to consolidate its range of durations and currencies. For now, there are no plans to launch new ETFs, but the firm assures that they are open to the possibility of new strategies in the future—such as dollar-denominated vehicles—as the market demands.

In addition to the indexed vehicles launched this year, the firm has three other debt strategies: Chile Short Duration, focused on time deposits issued by Chilean banks; Chile Corporate, which primarily invests in UF-denominated bonds from Chile’s largest companies; and Global Corporates, indexed to a Bloomberg index, with high-credit-quality, intermediate-duration dollar debt.

The firm also has three equity ETFs: Global Equities, anchored to a FTSE Russell index; an ETF indexed to the iconic S&P 500 from S&P Dow Jones Indices; and Nasdaq 100, a strategy focused on the U.S. tech sector.

Alternative Options

In addition to the ETF business, Singular AM has two other business lines focused on investing in private assets.

The firm has four alternative vehicles, giving investors access to the real estate market in Chile through different approaches. Three of these funds are Lease-Back strategies, where the manager purchases a property and leases it to a company with the option to repurchase it at the end of a period.

These vehicles, as explained by the firm, have a one-year investment period with monthly contributions. Once this period ends, the fund is closed, and the manager lets the portfolio “mature.” At that point, they start a new fund with the same investment logic.

Currently, the firm plans to maintain this sequence, projecting the launch of its fourth Lease-Back fund next year.

The other strategy, called Residential MBS I, invests in subsidized mortgage loans. The vehicle was launched in 2021 and has reported good results. Furthermore, the firm is exploring the possibility of launching a second iteration of this strategy.

Alternative assets are also at the core of Singular AM’s distribution business, the third pillar of the company. The Chilean manager has a binding relationship with specialized international managers Oaktree Capital Management and Brookfield Asset Management, distributing their strategies in Chile, Peru, and Colombia.

The relationship with these international managers is quite close, considering that Oaktree—controlled by Brookfield—acquired a 20% stake in Singular AM in 2019.

Why Does Japan’s Latest Election Result Cause Nervousness in the Markets and Political Uncertainty?

| For Amaya Uriarte | 0 Comentarios

Impacto de elecciones en Japón en los mercados

Although the market and investors are focused on next week’s election in the U.S., these are not the only relevant elections we have witnessed this past week. Three days ago, the Japanese went to the polls, resulting in a new political landscape: the Liberal Democratic Party, a conservative party, lost the elections and with it its majority in the House of Representatives. According to experts, this electoral setback does not signify the fall of the coalition government, but it does introduce a degree of political uncertainty, leading to market volatility.

This situation, combined with the divergence in monetary policy between the United States and Japan, has driven the volatility of Japanese equities. “Japanese equities have been very volatile over the past three months. Initially, the divergence between U.S. and Japanese monetary policies led to a swift unwinding of yen carry trade positions (where investors borrow in yen and invest in higher-yielding foreign assets) and a sharp appreciation of the currency. Later, uncertainty around domestic politics became the main driver of equity market volatility, culminating in the call for early general elections last Sunday, October 27,” note experts at Schroders.

Starting with the election result on Sunday, Kaspar Köchli and David A. Meier, economists at Julius Baer, explain that the reprimand of the Liberal Democratic Party (LDP) has introduced an uncommon element of uncertainty into Japanese politics. “With expectations for more aggressive policies declining, the Japanese yen further weakened against the U.S. dollar, in line with our non-consensus view, while the Bank of Japan (BoJ) is likely to maintain its stance a little longer,” they state.

To understand why the election result equates to market volatility, Julius Baer economists explain that with Prime Minister Ishiba committed to staying in office, it is likely that a minority government will be formed, led by the current coalition and with some opposition parties (such as the Innovation Party and the Democratic Party for the People) cooperating on an ad-hoc basis.

“Although the election result is unlikely to bring about significant changes in fiscal and monetary policy, the reduction in the coalition’s administrative power could pressure for increased fiscal spending, as proposed by some opposition parties. These proposals include cash payments for low-income households, which Ishiba has already announced, and extended subsidies for electricity and gas, according to Komeito’s manifesto. A reduction in the consumption tax could also be considered until real wage growth is more stable,” they add.

However, RBC BlueBay expects that financial markets may remain somewhat unstable due to political uncertainty in Japan. From its perspective, this will have little impact on the economy or the Bank of Japan (BoJ). “The initial indications suggest that the upcoming round of spring wage increases, known as Shunto, could again exceed 5%, in a context of high corporate profitability and continued labor shortages,” notes the firm. From this point of view, RBC BlueBay continues to see the BoJ on track to raise interest rates in January or December. In fact, it believes the latter option may be gaining strength with the yen under some pressure in recent days.

Japan at a Political Crossroads

As Janus Henderson recalls, capital markets reacted unfavorably to policies implemented by the DPJ between 2009 and 2012. “Therefore, the prospect of opposition parties like the CDPJ coming to power has raised concerns about possible market risk aversion. Conversely, if the LDP remains in charge, the capital market could gradually focus on identifying undervalued assets and recognizing strong corporate performance,” explains Junichi Inoue, head of Japanese equities at Janus Henderson.

In Inoue’s opinion, as Japan faces political instability, the need for a strategic response, particularly one that addresses concerns of low-income groups, is becoming increasingly evident. “The country now stands at a crossroads, contemplating three possible paths forward: forming a coalition government with an opposition party, navigating the complexities of a minority government, or seeing the Constitutional Democratic Party of Japan (CDPJ) lead a coalition with other opposition entities. Given the significant policy discrepancies among these opposition parties, the likelihood of a unified opposition seems slim,” he points out.

According to his analysis, a decision on the new government framework is expected within a month, amid market instability. “Since August, market trends have been unpredictable, and this trend is expected to persist until a stable government is established,” warns the expert.

The BoJ and its Monetary Policy

When analyzing the Bank of Japan’s (BoJ) monetary policy, investment firms agree that the gradual increase in interest rates in a context of rising inflation will largely remain unchanged. “Although political uncertainty may influence the timing of rate hikes, the BoJ can afford to wait given the low risk of inflation surging. We expect the BoJ to keep rates on hold this week and for the governor to avoid giving strong signals about a hike in December, as we anticipate the next hike only in March,” acknowledge Julius Baer economists.

In Lazard Frères Gestion’s view, conditions are favorable for the Bank of Japan to continue normalizing its monetary policy, reinforcing its confidence that deflation has ended: “In Japan, GDP is growing at a moderate pace, but this is against a backdrop of a population declining by 0.5% per year. This means that per capita GDP continues to grow at a good pace. Business confidence among companies most exposed to the domestic economy is also buoyant. Wages are rising at the fastest pace in the past thirty years, which has not prevented corporate profits from rising significantly. Inflation has returned to positive territory,” they hold regarding their view of the country.

Köchli and Meier, from Julius Baer, focus on the fact that the further decline in expectations for aggressive policies further weakened the yen after it had already experienced a decline just a few weeks ago with Prime Minister Ishiba’s retreat from his comments on the preference for a BoJ adjustment. “This is happening against a backdrop of yen strengthening due to the recent unwinding of carry trade positions. We have been skeptical of this strength due to the persistent divergence in monetary policy and consider our non-consensus forecast confirmed, with policy being only one component, albeit the least important. We maintain our 12-month target for USD/JPY at 160,” they state.

In this regard, Gilles Moëc, chief economist, and Chris Iggo, CIO Core Investment Managers at AXA IM, point out that markets expect the BoJ to raise another 25 basis points or so over the next year. “U.S. interest rates will remain more than 300 basis points higher than those in Japan next summer, based on current market forward prices. In real terms, U.S. short-term rates will remain around 1%, while Japanese short-term rates will remain negative by approximately the same amount,” they conclude regarding the divergence between both monetary institutions.

Black Bull Is Preparing To Launch Its Andean Region Family Office & Investors Summit In Chile

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(cedida) Black Bull Andean Region Family Office & Investors Summit 2024

The most important private event of the year, gathering business families, family offices, UHNWIs, investment funds, and key players from the region, arrives in Chile. This is the announcement from Black Bull Investors Club for the first edition of its Andean Region Family Office & Investors Summit. The event, to be held in Santiago, aims to become a meeting point for the Chilean financial industry.

The seminar will take place on November 5 and 6 at the Renaissance Marriott Hotel in the Vitacura district. The program, which covers various topics of interest to investors, begins at 9:00 a.m. after a registration period.

The event is designed to strengthen relationships and delve into themes such as family structuring and alternative investments. In addition to presentations and discussion groups, the event will also feature one-on-one meetings, networking spaces, thematic round tables, and an elevator pitch segment where investment ideas will be quickly presented.

This time, keynote speakers Javier Medina, Executive Director of Santander Private Banking, and Álvaro Peña Ospina, Executive Vice President of APG Capital Investments, will share their perspectives on wealth management and business families, respectively.

Opening Panels

The discussion panels at the Andean Region Family Office & Investors Summit will cover a range of topics related to wealth management, including family fortune dynamics and assets of interest, among others.

On the morning of the first day, three panels will take place in parallel. In the international real estate segment, which will explore emerging and established markets, Richard Perales, Portfolio Manager at FIBRA Real Estate Assets; Baloys Tiburcio, Senior Managing Director of Orange Investments; and María Álvarez, Partner at Vida Fund, will share their insights.

In the family structuring panel, which will discuss its role as a “pillar of success” for family businesses and family offices, Andrés Vial, President of Business Families of Chile (FEC), and Arnaldo Flores, General Director of Tienda Flores, will participate.

The capital markets segment, focusing on its challenges and opportunities, will feature Miguel Marcos, Regional Commercial Director for Latam at Exness; Juan Pablo Córdoba, CEO of nuam Exchange; and María Andrea Villanueva, Deputy Director of ColCapital.

After lunch, there will be a discussion segment on women leaders, which will also include Villanueva. She will be joined by Andrea Nazar, Managing Director of Criteria MFO and Country Head for Chile of We are MEF; Mane Guzmán, Executive Director of the ACVC; and Paula Valenzuela, Director of the Santiago Stock Exchange.

Simultaneously, there will be a discussion space focused on venture capital, described as “an expanding market.” Here, Pablo Fernández, General Partner of Venturance Alternative Assets; Andrés Pesce, CEO of Kayyak Ventures; José Tomás Daire, CEO of CF Inversiones FO; and Salvador Said, Co-founder of Grupo Said FO/30N Ventures, will share their perspectives.

Topics for the Second Day

On the second day of the Black Bull event, the midday panels will address several other topics in parallel. In the family succession panel—a crucial factor for family offices—María de los Ángeles Bringas, President of Ibero-American Business Families; Fadua Gajardo, Executive Director of the Chilean Institute of Directors (IDDC); and María Ansaldo, Partner at Juguetes Ansaldo, will share their experiences.

In a nearby room, the discussion will focus on the Chilean real estate market and its role in family office investment strategies. This panel will feature Germán Honorato, Founding Partner of LCH Invest; Alberto Ureta, General Manager of Nialem Real Estate Group; and Cristián Boetsch, General Manager of BE Capital Family Office.

In the tax compliance panel, four professionals will discuss key aspects of efficient management: Cristián Blanche, Founding Partner of Tax Advisors; Pablo Greiber, Partner Attorney at EY; Sebastián Gallo, Director of Tax & FO’s Services at Holding Pérez Companc FO; and Ximena Niño, Tax Partner at Deloitte.

Later, after a short break, the final thematic panels will take place. One will cover trends and strategies in alternative assets for family wealth management, featuring insights from Juan Carlos Aguilar, Founding Partner of Key Capital; Mauricio Cañas, Strategy Director at BTG Pactual Chile; Roberto Loehnert, Founding Partner of Venturance Alternative Assets; Jaime Herrera, Business Development Deputy Manager at ScaleX, nuam Exchange; and Nicolás Varas, Commercial Manager at Fynsa AGF.

The other panel will focus on education and leadership in the “next generation.” This topic will be covered by Giangranco Arata, professor at the Pontifical Catholic University of Valparaíso (PUCV); Carolina Pérez, CEO of the Chilean single-family office Celta Inversiones; and Jaime Ale, Managing Director of Ale Asociados.