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ETFs tend to be more tax efficient in the US than mutual funds because of the way that shares are bought and sold © Getty Images/iStockphoto

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Capital Group’s recently launched line of exchange traded funds will be included in a new batch of model portfolios that pair the ETFs with mutual funds from the asset manager’s American Funds subsidiary.

The so-called hybrid models, available on SEI, a service provider for financial companies, include F-3 share classes of some of the firm’s largest municipal bond funds, including its $26.6bn Tax-Exempt Bond Fund of America, $10bn American High-Income Municipal Bond Funds and $1.6bn American Funds Short-Term Tax-Exempt Bond Fund, a Capital Group spokesperson said.

Some of the models also include shares of the $1.3bn Emerging Markets Bond Fund and $71.6bn American Funds Smallcap World Fund, she noted.

The models also include an assortment of Capital Group’s six ETFs, the spokesperson said.

This article was previously published by Ignites, a title owned by the FT Group.

The ETFs are not currently in other models, she said.

The ETFs, which launched in February, had $835mn in assets as of April 30, according to Morningstar Direct.

The ETF line is made up of five equity ETFs and one fixed-income offering, the company spokesperson stated. When they debuted, a company executive said she expected clients could eventually use the ETFs in model portfolios.

“When you look at this hybrid format, we’re looking to bring to market the best of the ETF and tax advantages of them,” said J. Womack, managing director of product and personalisation line for SEI’s adviser business.

ETFs tend to be more tax efficient in the US than mutual funds because of the way that shares are bought and sold. The firm debuted the models in response to client demand for tax-advantaged wrappers for both investment vehicles, Womack said.

The dozen new SEI model portfolios have different goals across the spectrum of risk return, Womack said. There are conservative and moderate growth portfolios, as well as US and non-US-focused fixed-income and equity models.

Though ETFs are “inherently more tax-advantaged than mutual funds”, he said, “mutual funds offer that broad range Capital Group offers and investors know”.

He did not comment further on the tax implications of each strategy.

SEI’s models will be among the first to combine tax strategies for both mutual funds and ETFs in one service, Womack said. “We’re the first provider to offer it at scale,” he said.

The strategies will be available for investors on SEI’s wealth platform, the announcement notes.

Industry-wide, 54 per cent of advised assets are in model portfolios, according to a February report from Broadridge. ETF issuers and strategists have met that demand by rolling out more than 500 model portfolios between 2018 and 2021.

“We believe the ETF vehicle can deliver strong active management at the core of a portfolio and help investors meet their financial goals,” wrote Holly Framsted, Capital Group’s head of ETFs, in an email.

Capital Group’s strong history of returns will ensure that the new models are well founded and well received, she said.

SEI launched its first model with American Funds mutual funds in 2020, the announcement notes. The firm may eventually offer more models that include Capital Group ETFs, Womack said.

The models have “comprehensive solutions for qualified and non-qualified accounts”, he said. “And we expect a high level of adoption by advisers.”

*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignites.com.

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