ETF TV News #68 Jim Atkinson discusses converting first US mutual funds into ETFs

Deborah Fuhr: Welcome to ETF TV – I’m Deborah Fuhr. Today, we’re going to be discussing the first conversions of mutual funds into ETFs with Jim Atkinson, the CEO of Guinness Atkinson Asset Management. Welcome, Jim.

Jim Atkinson: Great to be here. Thanks for having me.

Deborah Fuhr: You’ve converted two mutual funds into ETFs. Can you tell us what the ETFs are and why you decided to convert to them, please?

Jim Atkinson: Yeah. The two are the dividend builder, now known as the SmartETFs Dividend Builder ETF and the Asia Pacific Dividend Builder, now known as the SmartETFs Asia Pacific Dividend Builder. They’re both quality dividend funds, one’s global and one’s in Asia. And why do we convert them? Well, I think the market’s spoken pretty loudly. Investors prefer ETFs to open and mutual funds, and both of these funds, in my opinion, are gems. And for them to be successful, I just felt they needed to be converted to ETFs.

Deborah Fuhr: And how long have they existed as mutual funds?

Deborah Fuhr: One is nine years old and the other is 12 years old.

Deborah Fuhr: And they’re both actively managed. Is that still the case?

Jim Atkinson: Yes, both actively managed, fully transparent.

Deborah Fuhr: And you were able to carry over a performance record?

Jim Atkinson: Two things in my head when we started this project were fundamental bedrock principles. We had to be able to carry over the track record and it had to be a non-taxable event for the shareholders.

Deborah Fuhr: How much money did you convert over with both products?

Jim Atkinson: One of them was around 4 million, the other is about 23 million.

Deborah Fuhr: And what were some of the biggest challenges, because I know you’ve been trying to do this for a number of years.

Jim Atkinson: Well, there’s a lot of little things, there wasn’t any big, major challenge, but obviously the first thing we had to do was go have a discussion with the SEC and talk to them about it. And they were very prepared for that conversation and they were very helpful. We had thought through a ton of issues before we got that first phone call with them and they brought up some issues that we hadn’t thought about. And they were clearly sort of thinking about this themselves or had given it some thought. And then it just took a long time going back and forth because there are just so many issues that needed to be dealt with; regulatory issues, disclosure issues, tax issues, et cetera.

This project is the biggest project of my career, and that’s because it touched every aspect of everything we do. All of our vendors, fund accounting, portfolio management, compliance, shareholder communications. The level of detail was, quite frankly, beyond what I thought it would be. And it just took a lot of time and work and a lot of people to get this done.

Deborah Fuhr: And did it require a proxy? Because I think that’s been one of the issues that’s been raised by many looking at this process.

Jim Atkinson: We may go back and have a proxy on some related issues, but no, we didn’t have to have a proxy to do this.

Deborah Fuhr: And I think another issue that others have raised is what happens to investors that don’t have brokerage accounts?

Jim Atkinson: Yeah, that was one of the issues we had to solve at the outset. There were a handful of shareholders in both of these funds that had their shares held directly with the fund. And of course, we wanted them to transfer into a brokerage account or somehow get themselves off the transfer agency platform. But you can’t count on 100% compliance with that. So we contacted a firm called American Stock Transfer, and American Stock Transfer is a corporate transfer agent. So the small number of accounts at the very end that hadn’t gotten off the platform were transferred over to AST.

Deborah Fuhr: And do you have other funds that you might consider converting in the future?

Jim Atkinson: Yes, and in a sense, it’s a bit of a test case, and we chose these two funds, because they were, as I mentioned before, we consider them gems, but they’re are also smaller. So, we knew that this project could be a little bit more manageable. But we’ve already got paperwork filed for another fund, our alternative energy fund, which we’re going to convert to a sustainable energy ETF. And then we haven’t decided what to do with the rest of our fund range, but my intent is to go ahead and begin converting the rest.

Deborah Fuhr: Do you think other firms will follow your lead?

Jim Atkinson: Well, we know some are. The ecosystem that surrounds this project, we now have been talking to multiple firms and people have been calling me asking about it. My view is everybody sees the same thing we see; which is that ETFs are just a better vehicle. And I can’t speak for the other fund companies, but if you look out 10 years, it’s not inconceivable that most, if not all, open and mutual funds become ETFs.

Deborah Fuhr: I think some of the roadblocks people feel are out there, is the 401K’s and fractional shares. What do you see as the way to get around some of those issues?

Jim Atkinson: Yeah, the 401K issue is a little bit tricky, but there’s nothing inherent that keeps people from buying ETFs and 401K’s. The only obstacle there is people are used to buying mutual funds in dollar amounts and you buy ETFs and share them out. But that’s not an insurmountable issue.

The fractional share issue we had to deal with throughout this project, most brokerage firms can handle fractional shares. You can’t handle fractional shares at the omnibus level or the DTC level. So each firm is going to have fractional shares in the shareholder account, has to have a dripper house account with a share in it, basically. But they’re used to doing that right now. I mean, you own a corporate stock, say Coca-Cola. You can have fractional shares in your account because you’re going to have dividend reinvestments.

Deborah Fuhr: Well, that’s great. So congratulations on being an innovator here in the ETF industry, and thank you for joining us today.

Jim Atkinson: Thank you. Pleasure to be here.

Deborah Fuhr: In other news, last week we had 61 new listings come to market, 34 cross-listings, 32 issuers brought new products to market. They were listed on 14 different exchanges around the world. 15 index providers provided indices, and a very significant number, 24 were actively managed ETFs. We continue to see ESG products, thematic products. 12 were fixed income, 49 were equity, and there was one digital currency product.

VanEck in Europe brought out an ethereum ETF, and the other big news was a long-awaited Ark Space ETF (ARKX) came to market with very significant and I think breaking an all-time record of gathering 452 million in assets in the first three days of trading. There was also the listing of the Emerge ARK Space ETF in Canada and other news, really just seeing more new listings coming to market from around the world.

Thank you for joining us this week. and we look forward to seeing you next week.

Published on April 6, 2021