Three Mutual Funds That Could Work As ETFs

by on May 25, 2010 | Updated July 8, 2014

As interest in ETF investing has accelerated, both asset levels and the size of the product lineup have expanded at impressive rates. Investors now have more options than ever before in the ETF space, a fact not universally celebrated by those who observe the industry. With over 1,600 exchange-traded products listed on U.S. exchanges as of 2014, some have proposed that the ETF space has become overcrowded with increasingly esoteric and targeted products, and that a wave of fund closures is inevitable.

Others take an opposite point of view. Growth in the ETF space has been driven largely by innovation, not duplication. Most of the new products to launch in recent years have been unique, first-to-market ideas: sector-specific emerging markets, hedge fund replication, and “one-stop shop” equity exposure just to name a few. And these new ETF products have been, for the most part, successful (see Why Reports Of An ETF “Bubble” Are Premature).

ETFs now offer investors instant exposure to almost every asset class, region, and investment strategy imaginable. Almost. There are still a few holes in the ETF coverage map, a topic on which we have offered up our thoughts before; several of the ideas laid out in this Ten ETF Ideas That Don’t Exist But Should feature have since hit the market (or are in the approval process). Below, we take a look at three products that have seen success as mutual funds but haven’t been launched as ETFs:

1. State-Specific Municipal Bond ETFs

The market for municipal bond ETFs has exploded in the late 2000s and the early 2010s; as of 2010, there is more than $6 billion invested in about 26 muni bond ETFs. Build America Bond ETFs launched by PowerShares and State Street in 2009 have been tremendously successful, rapidly accumulating assets. While there are currently a handful of ETFs linked to municipal bond indexes that concentrate on securities from California and New York, the vast majority of ETF assets (and all ETFs in the National Munis ETFdb Category) are diversified across states and territories.

In the mutual fund world, it’s a very different story; state-specific municipal bond funds are numerous, focusing on Arizona to Wisconsin. And many of these mutual funds have attracted significant assets; the Nuveen Michigan Municipal Bond Fund (FMITX) has about $211 million under management, while the North Carolina Fund (FCNRX) and the Ohio Fund (FOHTX) stand at about $441 million and $514 million, respectively.

2. Global Bond ETFs

Beyond just municipal bonds, the fixed income ETF space has seen tremendous growth in the late 2000s and early 2010s, both in terms of assets and breadth of product offerings. Some of the most popular bond ETFs are those in the Total Bond Market ETFdb Category, including the Barclays Capital Aggregate Bond Fund (AGG).

However, there isn’t an ETF that offers true exposure to global bond markets. State Street recently launched an international corporate bond ETF, and there are a handful of ETFs in the International Government Bond and Emerging Market Bond ETFdb Categories offer exposure to international debt. But there’s no ETF equivalent to the AllianceBernstein Global Bond Fund (ANAGX), which includes exposure to corporate, government, and mortgage-backed securities from dozens of emerging and developed markets. ANAGX has about $2.7 billion in assets, so a similar ETF would seem to be a “can’t miss” product.

3. Floating Rate Fund

Floating-rate bank loans are popular among investors, so it’s perhaps a bit surprising that there aren’t more ETFs focusing on this asset class; many fixed income ETFs explicitly limit their holdings to fixed-rate debt securities. Bank loan mutual funds invest in floating-rate bank debt taken on by corporations. Because the payments made adjust with the market rates, the interest rate risk is minimal.

There are dozens of floating rate mutual funds available currently, and many of them have attracted significant interest; the Eaton Vance Floating Rate Fund (EIBLX) has about $3.8 billion in assets, more than the majority of the fixed income ETFs currently offered to U.S. investors.

Growing Pipeline

There is, of course, no guarantee that these funds would be a hit with ETF investors. But they have proven to be popular as mutual funds, and it seems likely that such success would only be enhanced by the inherent advantages of the ETF structure.

As of 2014, the ETF industry seems ready to continue its impressive growth in coming months and years. We’ll have to wait and see if any of the ideas highlighted above ever make it to market.

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Disclosure: No positions at time of writing.