In a significant shift within the exchange-traded fund (ETF) industry, First Trust, one of the leading issuers of US ETFs, has officially terminated its partnership with TCW Group Inc. as the sub-advisor for four major ETFs valued at approximately $8 billion. This decision marks a notable transition in asset management, with Smith Capital Investors now taking over the management of these funds.
Board Decision and New Management
According to recent filings, First Trust’s board of directors voted last week to end TCW’s role as the manager of these funds. The decision paves the way for Smith Capital Investors, a firm overseeing more than $5 billion in assets, to assume control of the funds. The shift in management underscores First Trust’s strategic adjustments in an ever-evolving ETF landscape.
Among the four affected funds, the First Trust TCW Opportunistic Fixed Income ETF, with assets worth approximately $4.2 billion, stands as the largest. Launched in 2017, this fund primarily focuses on investing in undervalued assets. The transition of management raises questions about potential strategy changes under Smith Capital’s stewardship.
Statements from Stakeholders
While First Trust has declined to comment on the decision, TCW Group acknowledged that discussions regarding the partnership’s future had been ongoing for some time. A spokesperson for TCW, Doug Morris, emphasized that the firm had recently launched its own ETF platform, which has witnessed substantial asset growth over the past year. TCW, which manages nearly $200 billion in assets, has also been expanding its presence in the ETF market, including the acquisition of Engine No. 1’s ETF business in 2023.
Changing Dynamics in the ETF Industry
The ETF market is witnessing a shift, particularly in active fixed-income management. Traditionally, ETFs have been associated with low-cost, passive index-tracking strategies. However, as retail investors increasingly allocate funds into actively managed ETFs, firms are adapting their offerings to meet this demand. Todd Rosenbluth, head of research at VettaFi, noted that while it is uncommon for sub-advisory roles to change in ETFs, such transitions are more frequent in the active mutual fund sector.
Smith Capital Investors, now set to oversee the affected funds, was founded by Gibson Smith, a former head of fundamental fixed income at Janus Capital. His expertise in fixed-income investment strategies is expected to play a crucial role in maintaining and potentially enhancing the performance of these ETFs under their new management.
The Bigger Picture: First Trust’s Market Position
First Trust remains a dominant player in the ETF market, managing over $250 billion in assets and generating nearly $1 billion in annual revenue from its ETF offerings. The decision to replace TCW with Smith Capital could be part of a broader strategy to refine its investment approach and better align with evolving market trends.
Meanwhile, TCW’s expansion into its own suite of ETFs signals its ambition to compete directly in the space, moving beyond its previous role as a sub-advisor. With the ETF industry growing rapidly, both firms appear to be positioning themselves for long-term success in a highly competitive market.
Conclusion
The termination of TCW’s sub-advisory role in First Trust’s ETFs marks a significant moment in the asset management industry. As Smith Capital Investors takes the reins, investors will be watching closely to see how these funds perform under new leadership. With shifting market dynamics and increasing competition among asset managers, the evolving ETF landscape is set to offer new opportunities and challenges for industry players.
Stay tuned for further updates on the financial markets and asset management industry.
