Capital Group Nails Timing on Fixed-Income ETFs

The firm, best known for its American Funds, launched the exchange-traded funds just before the Federal Reserve began to raise interest rates.

Reviewed by: Staff
Edited by: Mark Nacinovich

When Capital Group launched its lineup of actively managed exchange-traded funds in February 2022, the timing couldn’t have been better for new fixed-income products. 

That’s because just one month later, the Federal Reserve began to aggressively hike interest rates, going from near zero to the current range of 5.25% to 5.5%.

With bond yields now at 15-year highs, “building a portfolio for an investor with a 10-year plus horizon is a lot easier when fixed income is giving you 5, 6, 7%,” says Ryan Murphy, a fixed-income investment director at Capital Group. 

Capital Group now has a total of 14 ETFs: including six fixed-income ETFs, seven equity ETFs and one multi-asset ETF. Six of those funds have more than $1 billion in assets under management, including its largest, the Capital Group Dividend Value ETF (CGDV) with $4.4 billion, which costs 0.33% annually. Its biggest bond ETF, the $1.2 billion Capital Group Core Plus Income ETF (CGCP), is an unconstrained bond fund with a 0.34% expense ratio that seeks income and capital preservation. 

In all, the nearly century-old firm has gathered $15.5 billion in ETF assets under management since launching its products nearly 18 months ago. Year to date, Capital Group has captured 8% of all active ETF flows, including 10% of equity and 6% of fixed income, according to Murphy.  

The $2.4 trillion asset manager, best known for its American Funds mutual fund offerings found in 401(k) plans—and more specifically for its equity growth funds—has spent the last 10-plus years beefing up its fixed-income capabilities. For the past five of those years, the firm’s fixed-income business has grown by more than 50% to $473.5 billion.  

Fixed-Income ETFs 

Capital Group has attracted more active fixed-income assets than any other asset manager in the U.S. across both exchange-traded funds and mutual funds year to date, making it one of the few firms not seeing outflows from its mutual funds. Fifteen percent of all flows go through its ETFs, according to Murphy. He attributes that growth to fund design, feedback from top advisors and partnerships with key distributors.  

Part of Capital Group’s quick success can be chalked up to hiring away current head of global product strategy and development Holly Framsted from iShares, as they tapped into her deep ETF business knowledge, says Elisabeth Kashner, director of global funds research at FactSet. 

“There's a lot of firms that don't know what they don't know about the ETF space, and it comes to bite them in the butt,” Kashner explains. 

Capital Group didn’t convert existing mutual funds to ETFs—it designed new actively managed ones. While that helps keep the two business models separate, it also means the new ETFs have little track record, so it takes a bit of convincing to get advisors to invest in a new product. Pitching active exchange-traded funds is just as tough, as most advisors still think of ETFs as passive. 

“That [has been] as big a challenge in a conversation as any other we're having,” Murphy acknowledges. 

Active ETFs 

While active ETFs have been gaining ground, Kashner believes they still face the same issue as active mutual funds: underperforming indexes. She recognizes that although lower fees for ETFs lessen the performance drag, “you're as good as your last quarter, your last year.” 

Looking at the macroeconomic landscape, John Queen, a fixed-income portfolio manager, says bonds look particularly attractive, because they not only offer high yields but also have the potential for price appreciation if rates fall. 

With $2.4 trillion sitting in cash, figuring out where to put it next is critical for Capital Group. History suggests that the high cash rates of 5% for some money-market accounts will erode, while Capital Group’s research shows that over the last four economic cycles since 1995, the average yield of three-month U.S. Treasury bills drops 250 basis points 18 months after the Fed peaks. 

For investors looking for cash alternatives, funds like the core-bond CGCP, core-bond ETF Capital Group Municipal Income ETF (CGMU), or even the recently released Capital Group Short Duration ETF (CGSD), could be attractive, Murphy adds. “These give investors options on how they want to participate in the market.” 

Debbie Carlson focuses on investing and the advisor space for U.S. News. She is an internationally published journalist with bylines in publications including Barron's, Chicago Tribune, The Guardian, Financial Advisor, ETF Report, MarketWatch, Reuters, The Wall Street Journal and others.