Earlier in April, I covered the ongoing efforts by Fidelity to obtain exemptive relief from the SEC to issue ETF share classes of their mutual funds. This comes after Vanguard's patent for this system expired in May 2023.
If approved, I noted that this could lead to an "ETF Spring," a flourishing of hundreds of new ETFs using tried and true methodologies pioneered by longstanding mutual funds, albeit structured as a share class.
This isn't anything new—Fidelity has already been offering semi-transparent active ETFs corresponding to some of their popular active mutual funds (albeit as a stand-alone option), such as the Fidelity Magellan ETF and the Fidelity Blue Chip Growth ETF
Here's a look at three famous mutual funds I think would be great candidates for an ETF. The benefits would include greater inflows, wider reach, better tax efficiency, and increased interest from younger investors.
Vanguard Wellington Fund
The Vanguard Wellington Fund is a no-brainer candidate for an ETF version. As the oldest actively managed balanced fund, dating back to 1929, it would be a prime choice for conversion, an ETF share class, or even a stand-alone ETF spin-off.
Offering an ETF version would allow investors to sidestep the $3,000 minimum of the investor shares, potentially lower the already competitive 0.26% expense ratio even further and provide more tax efficiency.
If you're not familiar with this fund, you should be. The Vanguard Wellington Fund maintains a balanced portfolio, with approximately two-thirds allocated to stocks and one-third to bonds.
The stocks are selected for their favorable valuations, quality, and dividends. The bond portion primarily consists of intermediate-duration investment-grade corporate bonds, with some allocations to Treasuries, agencies, and mortgage securities.
This fund has survived it all, from the Great Depression to the 2008 financial crisis and beyond. Despite these financial disasters, it has returned an impressive 8.29% since its inception. It stands as the best example of a perennial "all-weather" fund, offering stability and growth across various market conditions.
Vanguard Wellesley Income Fund
If the Vanguard Wellington Fund is a good ETF candidate, then its more conservative, income-focused counterpart, the Vanguard Wellesley Income Fund, certainly deserves consideration as well.
The Wellesley Income Fund targets a mix of one-third in stocks and two-thirds in bonds. While it isn't as old as the Wellington Fund, it is still a very longstanding fund with an inception date of 1970. Since then, it has delivered an impressive, annualized return of 9.2%.
On the equity side, the Wellesley Income Fund is value-focused, targeting above-average dividend yields and growth. It maintains a fairly concentrated portfolio of fewer than 100 stocks, selected for their lower price-to-earnings (P/E) and price-to-book (P/B) ratios.
On the bond side, the fund has a similar intermediate duration in aggregate and focuses on investment-grade corporate bonds, providing a steady income stream while managing risk.
Converting this fund into an ETF would allow investors to avoid the $3,000 minimum investment required for the investor class shares and potentially lower the already reasonable 0.24% expense ratio even further.
This would make the Wellesley Income Fund more accessible and appealing, especially to income-focused investors seeking a conservative, balanced investment option.
Fidelity Contrafund
I was surprised to see that while FBGC and FMAG clearly correspond to Fidelity's active mutual funds, there hasn't been an ETF equivalent launched (yet) for the Fidelity Contrafund.
Fidelity Contrafund is another staple in 401(k) plans and a well-known, longstanding active mutual fund. When it started in 1967, it was designed to target a contrarian style of investing, focusing on out-of-favor stocks or sectors.
However, by the 1990s, under the direction of its primary manager, William Danoff (still in charge today), the fund adopted a large-cap growth strategy. The rest is history—over the last 10 years, Fidelity Contrafund has returned an annualized 14.71%, soundly beating the S&P 500's 12.69%.
While Fidelity has made this fund accessible with no minimums and a reasonable 0.39% expense ratio, an ETF version would likely attract the attention of younger, self-directed investors outside of a 401(k), where the Contrafund is usually found.
An ETF format could broaden its appeal and accessibility, tapping into a new demographic of investors who prefer the flexibility and tax efficiency of ETFs.
This content was originally published by our partners at ETF Central.