Why is There So Much Side-by-Side Management in the ETF Industry?

Abstract

As of 2018, around 60% of ETF managers manage mutual funds in a "side-by-side" arrangement, most of which are active mutual funds. Mutual fund managers with institutional clients and exposed to strong ETF competition are most likely to adopt such dual roles. Side-by-side initiations lead to discretionary institutional mutual fund outflows and contemporaneous ETF inflows. These results are primarily driven by institutional "relationship" clients. Side-by-side ETFs charge an expense premium, suggesting that mutual fund firms exploit manager-client loyalty to mitigate the impact of rising ETF competition and to support the firms' transition to a new product portfolio with ETFs.

Keywords: ETF managers, mutual fund managers, side-by-side management, flows

JEL Classification: G23