This week we sit down with Carlo Forcione at Putnam to discuss the company’s views and support of the active ETF market.
Putnam has a long-standing track record as an active asset manager, having launched its first investment strategies in 1937. The firm entered the ETF market in 2021 with the launch of four active equity ETFs. You recently expanded the lineup to include four additional equity ETFs and three fixed income ETFs. What led to the decision to enter the market?
Putnam’s core mission has always been, and always will be, serving the needs of its clients. As the marketplace continues to evolve, investors’ needs change, and it was clear to us that clients were seeking Putnam’s strong existing capabilities, as well as new innovative strategies, in an ETF wrapper. Rule 6c-11 and the SEC’s issuance of exemptive orders for several semi-transparent ETF methodologies meaningfully lowered our barriers to entry. With a clear path to market and growing demand, our choice was clear: it was time to enter the ETF realm in a meaningful way.
As a global asset manager, what benefits and/or nuances come with operating an active ETF product line-up compared to other investment wrappers (i.e., mutual funds, CITs, etc.)?
From a purely logistical standpoint, our goal is to make it just as easy for our investment, operations, and technology teams to support ETFs as it is to manage mutual funds, CITs, SMAs, or any other vehicle. There are certainly nuances, but the day-to-day work is largely similar. From a commercial perspective, entering the ETF space has changed our business in numerous ways, but the most crucial shift has been in our ability to engage clients who principally invest through ETFs. This shift has helped us build more of the long-lasting relationships that are the foundation of our business.
Putnam is unique in offering active ETFs with various levels of transparency. Why offer both transparent active ETFs and an ETF utilizing a proxy structure? Any early observations on adoption?
Whenever we bring a new product to market, we carefully consider the best vehicle(s) through which to offer it, and the transparency framework is just another element of that evaluation. When determining the appropriate transparency framework, we consider the product’s asset class coverage and similarity to existing products, among other things. We think we are in good company with other issuers that offer their ETFs both transparently and semi-transparently based on what is best for shareholders, and we continue to monitor industry developments relating to transparency. When we talk to advisors about our ETFs, there is much greater interest in our portfolio managers and their investment processes than the specific disclosure model being used. Where both our transparent and semi-transparent active ETFs are available, adoption depends far more on strategy-specific considerations than on the transparency approach.
What are the key considerations that investors should contemplate when considering actively managed ETFs?
Every investor’s situation is unique, but Putnam frames the benefits of active ETFs very simply: they offer the benefits of active management with the potential cost, liquidity, and tax benefits of the ETF. For investors who see the value in that framework, their key considerations will naturally relate to the portfolio management team, historical risk-adjusted performance, and other strategy-specific items.
Lastly, what guidance would you provide sponsors as they consider expanding their product offerings to include actively managed ETFs?
Our best advice for potential new issuers is to find partners you trust across all areas of the ETF ecosystem. Your choice of custodian, distributor, counsel, liquidity providers, and, of course, primary listing exchange will all strongly impact your long-term success. We would not have the thriving, smoothly functioning ETF business we have today without the help of our partners. The NYSE has been among our most important partners since we first began our ETF journey. The NYSE team educated us, connected us to other important partners, and provided support well beyond what we expected from an exchange. Building an ETF business is challenging, but choosing the right partners makes it much easier – and provides a smoother path to success.
