KKM Financial Makes the Switch: Converting Mutual Fund to ETF
In a move that reflects the growing trend among asset managers, KKM Financial has converted its Essential 40 mutual fund into an exchange-traded fund (ETF). This change is expected to bring numerous benefits to investors, including improved tax efficiency and greater flexibility.
The Benefits of ETFs
Unlike mutual funds, which can sometimes hit investors with unexpected tax bills due to withdrawals or portfolio changes, ETFs allow investors and financial advisors with taxable accounts to choose when to create capital gains or losses. This makes ETFs a more attractive option for those looking to minimize their tax liability.
A Growing Trend
KKM Financial is not alone in making the switch. Many asset managers have been converting their mutual funds to ETFs in recent years, thanks in part to a 2019 SEC rule change that made it easier to run active investment strategies within an ETF. As a result, the number of active equity mutual funds has fallen to its lowest level in 24 years.
The Essential 40 ETF
The newly converted KKM fund, which will trade on the Nasdaq under the ticker ESN, aims to allow investors to “buy what you use” in one equal-weighted fund. Its holdings include well-known companies such as JPMorgan Chase, Waste Management, and Eli Lilly. The fund’s equal-weighted strategy has proven popular this year, as investors seek to diversify their portfolios and reduce their reliance on the so-called Magnificent Seven stocks.
Performance and Fees
The old mutual fund version of the Essential 40 had a three-star rating from Morningstar and delivered strong relative performance in 2022, declining less than 11% compared to the category average of about 17%. The ETF will have a net expense ratio of 0.70%, equal to that of the old mutual fund.
What’s Next?
As the investment landscape continues to evolve, it’s likely that we’ll see more asset managers following in KKM Financial’s footsteps and converting their mutual funds to ETFs. With their improved tax efficiency and flexibility, ETFs are becoming an increasingly attractive option for investors looking to maximize their returns and minimize their tax liability.
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