Envestnet enters the exchange-traded fund business for the first time. The portfolio advisory group this week launched four funds for use in the company’s “ActivePassive” PMC model portfolios.
There is no additional management fee for the funds.
Envestnet | PMC internally manages approximately $20 billion in assets using mutual fund and ETF allocation models. The company has operated its flagship ActivePassive models for 15 years using third-party funds as well as two proprietary mutual funds — one equity and one bond. Those mutual funds will be swapped for the new ETFs, said Dana D’Auria, co-chief investment officer and group president of Envestnet Solutions.
“ETF adoption is really about providing better models for management,” she said. “We believe that this model division of ours has great potential to continue to thrive and grow and we want to have the best chassis for that.”
D’Auria says they will distribute the models primarily through the Envestnet platform, where ETF model portfolios receive more than half of inflows and their share is growing.
“What we see on our own platform is that ETF models are preferred over mutual fund models or models of mutual funds and ETFs,” she said. “We know that’s because they have some inherent efficiencies in terms of costs and taxes. That’s why we want our own models to be as state-of-the-art as they can be.”
According to Cerulli data, the combination of active and index strategies was the most popular variant of model portfolios in 2021.
Envestnet | PMC has a long track record of combining the characteristics of active and passive investing into one strategy, but this is the first time the company has done so with its own ETFs.
The four funds include ActivePassive US Equity ETF (APUE), ActivePassive International Equity ETF (APIE), ActivePassive Core Bond ETF (APCB) and ActivePassive Intermediate Municipal Bond ETF (APMU). Within each fund, Envestnet manages the passive and factor exposures, while the active component is managed by third party managers from firms such as AllianceBernstein, Causeway and Neuberger Berman.
“Access to third-party managers is one of the distinguishing features of Envestnet funds,” said Todd Rosenbluth, research director at VettaFi.
“Envestnet’s platform has access to investment strategists who provide their expertise in a format that is more difficult to access for an investor or advisor who is increasingly using ETFs,” he said. “So it looks like this would be a more tax efficient way to target some of these great investment strategists that are featured on the Envestnet platform and vetted by the Envestnet PMC team.”
The ETFs address three basic ways to approach a portfolio that combines passive funds with active management: for strict market beta exposure; use factor signals such as value, momentum and quality; and for fundamental/technical active analysis.
In addition to Envestnet’s ETFs, the model portfolios also use funds from third-party providers such as Vanguard, iShares and FlexShares.
Capital Group has established one similar strategy earlier this year, when the company launched 12 active-passive model portfolios consisting of American Funds’ active mutual funds and passive ETFs from Vanguard, Schwab, and BlackRock. Capital Group strategizes the models, selects the passive ETFs and manages the allocations.
“Envestnet is not reinventing the active-passive combination,” Rosenbluth said. “What is unique about Envestnet is that security selections are selected based on their due diligence process.”