In March, Guinness Atkinson became the first asset manager in the US to convert an active mutual fund into an ETF with the launch of two NYSE-listed ETFs: ADIV & DVIS. Having previously launched three active ETFs under the SmartETFs brand in late 2019 and 2020, what led to the decision to pursue an ETF lineup expansion via conversion instead of launching clone strategies to your legacy mutual funds in the ETF wrapper?

It is clear that investors prefer ETFs and for good reason. That is what is behind our move into the ETF space. There was a lot of thought given to our decision to convert, but mostly it was the understanding that investors, industry wide, are transitioning from traditional open end funds to ETFs. By converting, we’re able to maintain our long-term track records that these funds enjoy. The launch of a clone is technically a new launch and starts with zero track record.

Based on your experience launching ETFs through both the traditional path and conversion, what are the key considerations for asset managers that are exploring mutual fund to ETF conversions?

Every asset manager is going to face their own challenges in converting. Multiple share classes and multiple distribution channels complicate the process. None of these complications are prohibitive, but the more complex the business the more details that will require attention. What we learned throughout the process is that while there is no single difficult issue, converting touches every aspect of the business and there are a lot, and I mean an awful lot, of details that need attention. For fund companies not yet in the ETF space, my advice is to make sure you’re on top of the capital markets side of operating an ETF. By this I mean the exchange and listing, the lead market makers and the Authorized Participants. All of these need to be in place before you can convert and some of these arrangements can take months to put in place. The NYSE is very helpful in sorting through these issues.

You have previously described the conversion process as the “biggest project of your career” and have been open about describing some of the obstacles. What were the main obstacles and has your team’s work created a “playbook” for future asset managers?

It isn’t so much any large obstacles as the scope of the project. I’ve mentioned that a conversion touches every aspect of the business. Some examples: Portfolio management. PMs need to understand how ETFs work and how the basket is created and managed. Some foreign markets have odd lot requirements that may need to be thought through.

Your shareholder communications effort needs to be thought through. Much of this is driven by the disclosure rules and legal requirements but when considering a conversion plan this is an area that requires some thought. Thought needs to be given not just to the conversion process but to the post-conversion process because there is a requirement that ETFs provide daily data on the web.

Direct shareholders present a challenge. Ideally they move off the TA platform prior to conversion, but there’s basically zero chance of full compliance. The conversion plan will need to address how to communicate to these investors and how to handle the direct shareholders that are in place on conversion day. We utilized American Stock Transfer for these shareholders and that has worked well. Ideally this is a short-term solution but I can see for funds with a lot of direct investors this solution may be semi-permanent.

One challenge associated with direct shareholders are the IRA accounts. These have their own notice requirements if you’re changing custodians.

Now that we are nearly two months removed from the conversions, what observations do you have? Particularly on the status of direct shareholder conversion and client/prospect feedback. Also, should we expect to see more conversions on the horizon from your team?

You will see more conversions of Guinness Atkinson Funds to SmartETFs. Client feedback has been universally positive. By and large our direct shareholders are willing to process the paperwork to transfer their shares to a brokerage account but we have had trouble reaching some of these shareholders and this process will take some time to complete. Overall I’m pleased with how the conversion went for our direct shareholders but that doesn’t mean it was perfect.

What guidance would you provide sponsors as they consider expanding their product offering to include actively managed ETFs, be it through a traditional launch or a conversion?

The ETF ecosystem is completely different from the ecosystem required for traditional mutual funds. Traditional fund managers looking to get into the ETF space should begin the process of understanding how ETFs work in detail and begin getting relationships in place with market makers and Authorized Participants. The NYSE is extremely helpful in this regard. This process can take time and certain elements are hard to rush. Having the right Lead Market Maker and APs in place can play a critical role in the success of an ETF. We relied heavily on the NYSE’s expertise and assistance and they helped us put together a great team.