Envestnet is getting into the exchange traded funds business for the first time. Its portfolio consulting group launched four funds this week, available to use in the firm’s “ActivePassive” PMC model portfolios.
The funds come with no additional management fee.
Envestnet | PMC manages some $20 billion in assets in-house, using allocation models made up of mutual funds and ETFs. The firm has run its flagship ActivePassive models for 15 years using third party funds as well as two proprietary open-end mutual funds—one equity and one fixed income. Those mutual funds will be traded out for the new ETFs, said Dana D’Auria, co-chief investment officer and group president of Envestnet Solutions.
“The ETF launch is really about delivering better model management vehicles,” she said. “This business line of ours in the model space we think has a great ability to continue to thrive and grow, and we want to have the best chassis for that.”
D’Auria says they’re going to distribute the models primarily through the Envestnet platform, where ETF model portfolios are getting more than half of the flows and growing in share.
“What we see on our own platform is that there is a preference for ETF models as opposed to mutual fund models or models of mutual funds and ETFs,” she said. “We know that’s because they have some inherent efficiencies around cost and tax, so we want our own models to be as state of the art as they can be.”
According to Cerulli data, blending active and index strategies was the most popular flavor of model portfolios in 2021.
Envestnet | PMC already has a long track record of combining the attributes of active and passive investments into one strategy, but this will be the first time it does it with its own ETFs.
The four funds include the ActivePassive U.S. 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-based exposures, while the active component will be managed by third-party managers from firms like AllianceBernstein, Causeway, and Neuberger Berman.
That access to third-party managers is one of the differentiators here with the Envestnet funds, said Todd Rosenbluth, head of research at VettaFi.
“Envestnet’s platform has access to investment strategists who provide their expertise in a format that is harder to access for an investor or an advisor who is increasingly using ETFs,” he said. “So this looks like this will be a more tax-efficient way of tapping into some of those great investment strategists that are on the Envestnet platform and have been reviewed by the Envestnet PMC team.”
The ETFs are hitting the three basic ways you can approach a portfolio that combines passive funds with active management: for strict market beta exposure; to use factor signals like value, momentum and quality; and for fundamental/technical active analysis.
In addition to Envestnet’s ETFs, the model portfolios use funds from third parties such as Vanguard, iShares and FlexShares as well.
Capital Group launched a similar strategy earlier this year, when it launched 12 active-passive model portfolios, comprised of American Funds’ active mutual funds as well as passive ETFs from Vanguard, Schwab and BlackRock. Capital Group acts as the strategist for the models, selecting the passive ETFs and managing the allocations.
“Envestnet isn’t reinventing the active/passive combination,” Rosenbluth said. “What’s unique about this is that the security selectors are being chosen by Envestnet based on their due diligence process.”