The Nasdaq MarketSite in New York, USA, on Monday, September 16, 2024.
Yuki Iwamura | Bloomberg | Getty Images
KKM Financial has converted its Essential 40 investment fund into an ETF, joining the growing shift among asset managers towards a more tax-efficient fund model.
ETFs make it easier for investors and financial advisors with taxable accounts to choose when to create capital gains or losses. This differs from mutual funds, which can sometimes hit their investors with an unwanted tax bill due to withdrawals or portfolio changes.
“If you look at the tax efficiency of an ETF compared to a mutual fund, it’s much more beneficial,” says Jeff Kilburg, founder and CEO of KKM and a CNBC contributor. “Many of the wealth advisors I work with have real problems with the capital gains distribution that is typical of a mutual fund.”
Many asset managers have converted their mutual funds into ETFs in recent years, partly due to a 2019 SEC rule change that made it easier to execute active investment strategies within an ETF. According to Strategas, the number of active equity funds has fallen to the lowest level in 24 years.
More broadly, many asset managers are pushing the Securities and Exchange Commission to add ETFs as a separate share class within existing mutual funds.
The newly converted KKM fund will trade on the Nasdaq under the ticker ESN. The goal of the Essential 40 is to allow investors to “buy what you use” in one equal-weighted fund, Kilburg said. His assets include JPMorgan Chase, Amazon, Waste management And Eli Lillyaccording to FactSet.
“We believe that without these companies, the American economy would be hampered or in trouble,” he said.
The old mutual fund version of the Essential 40 received a three-star rating from Morningstar. The best relative performance in recent years came in 2022, when the stock fell less than 11% – much better than the category average of around 17%, according to Morningstar.
Equally weighted funds can often outperform market cap indexes during recessions. They have also been a popular strategy this year, partly due to concerns that the market was too reliant on the so-called Magnificent Seven stocks. The Invesco S&P 500 Equal Weight ETF (RSP) According to FactSet, it has raised more than $14 billion in new investor funds this year.
According to FactSet, the KKM fund was up about 16% in 2024 before the conversion, with about $70 million in assets.
The ETF will have a net expense ratio of 0.70%, the same as that of the old mutual fund.