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TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.
Welcome to the TCW Investment Perspectives Podcast, where
our investment professionals share their insights and
expertise on how to make the most of your portfolio.
I'm David Vick, Managing Director in Fixed Income at TCW.
ETFs have been part of the investing lexicon for
decades, but the industry continues to evolve.
Active ETFs, which seek to outperform a
benchmark, continue to grow by leaps and bounds.
They now capture nearly 40% of ETF flows,
despite being only 10% of existing assets.
And there are now more active listed ETFs in the U.S.
than passive ones.
As if that isn't enough, the industry is now preparing for regulators
to approve a new type of ETF that is closely tied to mutual funds.
To dig into how multi-share class ETFs will likely impact
the market, we welcome Scott Dennis, Head of ETFs at TCW.
Scott, thanks for joining the podcast.
Thanks for having me, Dave.
You bet.
But before we get into the multi-share class stuff,
let's talk just a little bit generically about ETFs.
What are you seeing in the industry?
What's happening today in the ETF world?
Yeah, I mean, ETF assets definitely continue to grow very rapidly.
The industry is actually heading towards the second
consecutive year of $1 trillion or more of total net inflows.
Really what happened, the passing of the ETF rule in 2019
called 6C11 really made it easier to launch new ETFs and really
pave the way for this active ETF explosion that we've seen.
So active ETFs have emerged over the past three years
as a major reason for this growth we've been seeing.
We saw $1.
3 trillion in ETFs and active ETFs in 2024.
Currently, we're at about $700 billion year to date with
December typically being the largest month in inflows.
So definitely expected to surpass the 2024 record inflows.
We've had 66 straight weeks of positive flows
for active, so the train keeps on going.
And you said some of these stats before, Dave, but just to reemphasize.
In 2023, despite being just 10% of assets,
active ETFs took in 20% of net inflows.
So that really stands us at about a 40% annual growth rate for active ETFs.
From terms of growth in ETFs, the number of ETFs out there,
we're already about 12, 000 from a global industry perspective.
This year alone, we're expected to see about 900 ETFs launched.
So adding to that 12, 000.
What's surprising to me, I think, is the industry is that 90%
of those ETFs that are launched this year have been active.
So really everybody's jumping into the pool and launching active ETFs.
And there's been a lot of successful launches out there
with some ETFs trading over $80 billion in assets.
And we're expected to see a lot of new
launches and approvals in second half of 2025.
All right, great.
Thanks.
Lots of dollars in play for sure.
So let's turn to the multi-share ETFs.
Let's talk about the details, like the logistics.
How do they actually work?
Why are people starting to pursue them?
And mechanically, you know, how do you do a multi-share ETF?
Sure.
Thanks.
Great question.
Multi-share class offers the ability for more choice for investors.
So investors are typically looked at mutual funds and want a wrapper that
potentially has daily transparency, potentially better tax treatment.
And then also daily transparency gives those
looking for choice and ability to do that.
The second advantage you see in launching an ETF share class
is that you have an already established pool of assets.
So when you launch a share class off of that,
you don't need to go and look for seed capital.
You already have an established track record.
You already have an established fund that's mature and
is able to take in assets in a much more efficient way.
So when this potentially does get approved, it'll bring in a
lot of opportunities to provide choice and provide choice in a
much more efficient way than launching just a standalone ETF.
It allows an investor to want to invest in a fund
family and then choose which best for their need.
With the added choice of a multi-share class fund structure,
investors have the ability to take a look at a pool of assets
that has a strategy, an existing mutual fund, for example.
And within that mutual fund, they love the performance.
They like the holdings.
They've been a long term holder.
But perhaps they want to transition or allocate to the ETF share class.
The ETF share class will represent the holdings in the existing legacy
mutual fund have similar performances, a performance as the mutual fund.
But it'll also give you the ability to have a daily transparency,
daily liquidity and a more tax efficient structure.
Multi-share class ETFs have actually been around since 2000.
Vanguard originally launched with this structure.
Their patent on it expired in May 2023.
Multi-share class is actually something that's widely used in
Europe, so it's really not something that's new to the industry.
With the expiration of the patent in 2023, a lot of ETF issuers and
other firms in the industry have filed for regulatory approval to
expand into this multi-share class, particularly for active ETFs.
I think at time of right now it's about 62 and growing rapidly.
So where does that leave us?
So in March of 2025, the SEC actually prioritized ETF share class approval.
What this could lead to is approval this year.
We actually think it's imminent, happening very quickly,
which will then lend us to a launch in early 2026.
What this means is the approval will lead to ETF growth.
But I really don't think this is going to be an overnight phenomenon.
I think there's some expectations in the marketplace that when
it does get approved, we'll just see this explosion of growth.
But keep in mind, there's a lot of things that need
to change in the industry before this can happen.
Boards need to approve the new structure.
Accounting needs to get sorted out.
And the liquidity community really needs to figure out how to
manage 12, 000 already with potentially even more coming out.
So despite the approval potentially happening imminently and then
launches in 2026, I don't expect that 12, 000 to double really quickly.
I think it's going to be a slow growth as we move into it.
So even if things start slow, do you think over time this means that
mutual fund companies start to morph into ETF companies over time?
Yeah, I think it's hard to ignore the data that we've seen
over the past couple of years where there's historically
been a lot of mutual fund outflows and a lot of ETF inflows.
So I think a lot of firms out there are repositioning and strategically
thinking about how their business is going to grow in the future.
I think a lot of these businesses are taking a look at their distribution
force, taking a look at their current mutual fund lineup and seeing if there's
areas of growth that they can take advantage of in the ETF environment.
I do feel that mutual funds are still very important.
Being in the ETF industry for many years, I'm a big
believer that not everything can be wrapped in an ETF.
There's certain asset classes that belong in a mutual fund and there's
certain types of investors and certain types of investing like
in retirement that really is dominated by mutual fund space.
I don't think that's going to change around any quickly.
So to answer your question, yeah, I think there's going to be a lot of change.
A lot of firms who have historically been very mutual fund or
mutual fund only are expanding into ETFs to take advantage
of the growth that we've seen over the past couple of years.
Great.
You know, we should talk a little bit about
getting launches done, but how hard is it?
Like how much work is it to get this all done
once we get past the regulatory approval?
And that might be the biggest hurdle.
I don't know.
It will be challenging for legacy mutual fund shops who
don't have an ETF business to rapidly grow in this space.
There needs to be some expertise in-house on ETFs
or structure to develop a capital markets business.
I think the one big difference that you have between mutual fund and ETFs is the
exchange traded portion of ETFs where with a mutual fund, you can launch it.
You don't necessarily need a partner in the liquidity
community to lead market make and trade your ETF.
You don't need to connect to them as well.
So developing partnerships with liquidity communities through a lot of these
market makers, developing relationships with exchanges, getting your ETF
listed on exchange, and really having an understanding of how ETFs
trade and are managed differently than individual mutual funds.
Also, from a board perspective, ETFs do trade
differently, they are managed differently.
So if you now take a look into a multi-share class focus, these boards are going
to need to take a very close look at the interplay between your mutual fund
share class or ETF share class and other share classes and ensure that the
transfer or the movement of assets between both is done in a fiduciary manner,
that taxes are handled appropriately between
the two, and then really move from there.
I think from an industry perspective, the onus is going to fall on the
individual firms and their boards to ensure that the process that they have
for moving into a multi-share class structure is done in the right way.
Got it.
So with all that in mind, and obviously there's some challenges,
and there's obviously been tremendous growth in ETFs
in the recent past, what do you expect going forward?
More new products?
What sort of new things might be on the horizon beyond this?
Yeah, I don't think we're going to see a lot of new launches in the beta space.
I think that is saturated.
I think there's a lot of major players that have significant
amount of assets and significant amount of volumes going forward.
I do think the growth we're going to continue to see, which goes
back to my point that 90% of launches this year have been inactive.
It's really going to be in the active space, really a question on how
good a firm is at producing alpha in an ETF and an active ETF wrapper.
I certainly do expect to see a lot of new innovative products
coming out when multi-share class does get approved.
Already there's 12, 000 out there already.
A lot of those this year being launched have been in the active space.
I think a lot of firms are going to be innovative.
And I think a lot of the development we're going to see later in this year
and in 2026 is really going to be focused on ETFs in the digital space.
PCW being one of them, we're certainly exploring ways that we
can innovate and think about how we can launch ETFs in digital.
So clearly from our standpoint, there's a lot of great things about this, right?
It allows us to launch a new ETF or a new classroom ETF, but using the
sort of the scale and the track record of an existing mutual fund,
which presumably has been around for a long time and people like.
So from our standpoint, I get why it's attractive.
What makes it compelling for an investor or for one of our clients?
Yeah, I think that's a really important point to discuss here, Dave.
When you launch an ETF from ground zero without a
multi-share class, it doesn't have a track record.
It has seed assets.
It doesn't have any trading volume.
So it's difficult to grow that ETF.
Typically in ETFs, it takes about a year, not only of
performance, but of maturity for it really to take off.
Oftentimes, an ETF will need a one-year track
record in order to get approved by platforms.
And when it does get approved, typically, that's
where you'll see growth move relatively quickly.
If you launch an ETF off of an existing mutual fund, you
forego that one year and you take the track record and
the history of that mutual fund since its existence.
So on day one, when you launch an ETF off of an existing mutual
fund, you're getting the benefits in the history of that
existing mutual fund, the diversification, the strategy.
And you're basically buying into a mature,
fully diversified security fund on day one.
But at the same point, you're now getting, again, the same exposure.
But as I mentioned before, you're getting daily transparency.
You're getting intraday liquidity.
And you're also getting the tax benefits that ETFs provide.
So it's kind of the, in some ways, the best of both worlds, the positive of an
existing mutual fund with those benefits that we all talk about on the ETF side.
Absolutely.
And quite honestly, it's really just giving the choice,
more choice back to the investor and taking a look at which
vehicle, which wrapper is best for their investment needs.
Great.
Thanks for that.
That's all the time we have today.
So thanks, Scott, for joining us.
For more information on TCW strategies, please visit our website at tcw.
com.
Thanks for listening.
And we'll pick up next time exploring more trends
and opportunities that are shaping global markets.
Thank you for joining us today on TCW Investment Insights.
For more insights from TCW, please visit tcw.
com slash insights.
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