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 increasing shift by asset managers to a more tax-efficient fund model.
ETFs make it easier for investors and financial advisors with taxable accounts to decide when to realize capital gains or losses. This distinguishes them from mutual funds, which can sometimes burden their investors with an unwanted tax burden due to withdrawals or portfolio changes.
“If you look at the tax efficiency of an ETF compared to a mutual fund, it is much more advantageous,” said Jeff Kilburg, founder and CEO of KKM and a CNBC contributor. “Many of the investment advisors I work with really struggle with the capital gains distribution typical of a mutual fund.”
Many asset managers have transitioned their mutual funds to ETFs in recent years, in part due to a 2019 SEC rule change that made it easier to implement active investment strategies within an ETF. According to Strategas, the number of active equity funds has fallen to its lowest level in 24 years.
More broadly, many asset managers are pushing the Securities and Exchange Commission to allow ETFs to be included as a separate share class within existing mutual funds.
The newly converted KKM fund will trade on Nasdaq under the ticker symbol ESN. According to Kilburg, the goal of the Essential 40 is to allow investors to “buy what they use” in an equal-weighted fund. His holdings include JPMorgan Chase, Amazon, Waste management And Eli Lillyaccording to FactSet.
“We believe that without these companies, the U.S. economy would be hampered or in difficulty,” 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 it fell less than 11% – much better than the category average of about 17%, according to Morningstar.
Equal weighted funds can often perform better than market capitalization weighted indices during downturns. They continued to be a popular strategy this year, partly due to concerns that the market was overly reliant on the so-called “Magnificent Seven” stocks. The Invesco S&P 500 Equal Weight ETF (RSP) The company has raised more than $14 billion in new investor money this year, according to FactSet.
According to FactSet, the KKM fund was up about 16% in 2024 before its conversion and has about $70 million in assets.
The ETF will have a net expense ratio of 0.70%, which is the same as the old mutual fund.