$600B asset manager jumps on board the ETF train
The funds are geared toward those looking for socially responsible investments
Federated Hermes, a Pittsburghbased heavyweight among U.S. asset managers in the mutual fund industry that already handles billions of dollars of investors’ money, recently tossed its hat into a new arena — the exchange traded fund market.
The Downtown investment company in December made its foray into the fast-growing ETF world with two new funds, both focused on fixed-income investments.
Fixed-income — a term that describes bonds and other highly liquid, cash-like assets that pay steady income — was a natural starting point for the global fund manager. The company already holds the lion’s share of its total assets under management — just over $500 billion out of its total $600 billion — in money market accounts and fixed-income investments.
Equity ETFs — which are baskets of various stocks — will be
As with all of the company’s financial products, the new funds are geared to serve investors who prefer a socially responsible investment approach that analyzes potential investments based on environmental, social and governance (ESG) factors.
part of the mix, too, for Federated Hermes as it establishes a foothold in an investing arena that started small in the 1990s and has since ballooned.
These are not huge launches. Both of the new funds — the Federated Hermes Short Duration Corporate ETF and the Federated Hermes Short Duration High Yield ETF — have $25 million in assets each.
They’re just the start for the Pittsburgh company’s strategy.
“We’re going to be launching a lot more products — both fixed-income and equity,” said Brandon Clark, director of the ETF business at Federated Hermes. Federated Hermes manages about $100 billion in equity assets.
As with all of the company’s financial products, the new funds are geared to serve investors who prefer a socially responsible investment approach that analyzes potential investments based on environmental, social and governance (ESG) factors.
Federated Hermes is bringing its two fixed-income ETFs onto the scene at a time when interest rates are poised to rise — which could add to the challenge. Fixed-income investments tend to be sensitive to interest rate movements because as rates go up, the value of fixed income portfolios go down.
The managers hope they can navigate around that potential pothole.
The impact of rising rates is more dramatic on longer duration fixed-income investments, such as the 30-year U.S. treasury bond. The Federated Hermes ETFs have the advantage of buying short-term bonds as well as being actively managed by traders, as opposed to simply tracking an index.
“Because these are shorter duration, while interest rates go up, they may move negatively as far as
as returns. But they won’t move as much,” Mr. Clark said, adding that fixed-income is a diversifier to portfolios bulked up with stocks.
“This is about building broad diversified portfolios,” he said. “Not everything goes up all the time. A lot of clients are getting more defensive and trying to shorten duration in their fixed-income portfolio and maybe mute the impact of interest rate movements.”
The rise of ETFs
Federated Hermes is making the move to ETFs when the asset class is more popular than ever. Exchange traded funds appeal to investors and asset managers who see them as a low-cost and more tax-efficient way of investing in equity and credit markets.
While mutual funds still rule the investment universe with total assets of $22 trillion, exchange traded funds that can track everything from bonds and commodities to just about every nook and cranny of the investment world have garnered a $7 trillion share of the market since they were introduced in the 1990s, according to data provided by the Investment Company Institute in Washington, D.C.
Investment dollars have piled into exchange traded funds, and ETFs keep growing in numbers even as they become more exotic. There were 2,683 such funds on the market in the third quarter of 2021, according to the New York Stock Exchange.
Exchange traded funds are similar to mutual funds in that they offer investors partial ownership of an undivided pool of stocks and other assets.
They try to replicate the performance of a stock market index such as the S&P 500 or a market sector such as energy and technology or commodities such as gold or silver.
One of the main differences between exchange traded funds and mutual funds is that mutual funds only trade at the end of the day and investors cannot use options contracts on them. ETFs can be traded throughout the day just like individual common stocks. Investors also can use options contracts on them in order to hedge the risk of the asset going down in value.
Mutual fund investors may end up with a tax bill for capital gains even if their mutual fund shares lost value — due to the constant buying and selling that mutual fund managers do to rebalance the fund.
ETF investors are usually not exposed to capital gains on any individual security within the fund itself. However, investors who realize a capital gain after selling an ETF are subject to the tax.
“Since they were introduced, ETFs have really been a phenomenon,” said Paul Brahim, managing director at Wealth Enhancement Group, Downtown. “They started with just an S&P 500 ETF offered by State Street in the 1990s. And they have steadily risen to become a significant part of the pool of investments in the landscape.”
The largest providers of such funds in the U.S. in 2020, according to Statista.com, include Black Rock Financial Management with $2.3 trillion in assets under management; Vanguard with $1.9 trillion; and State Street Global Advisors with $938 billion.
Overall, Federated Hermes was the 26th-largest U.S. asset manager with $628.8 billion in assets under management in 2020, according to ADV Ratings. By comparison, Black Rock Inc. is ranked No. 1 with $7.3 trillion in assets.
“When you look at the list of top asset managers, almost every one of them — with the exception of one who is also entering the ETF business — is in the ETF business today,” Mr. Clark said.
Another chapter
For a company that recently reinvented itself with a new name, a new logo and a new philosophy on how it does business, the move by
Federated Hermes to enter the ETF market is one more chapter in its evolution.
In February 2020, the Pittsburgh company — then called Federated Investors Inc. — pulled what its chairman, Chris Donahue, described as “a reverse transformational merger.”
The company changed its name to Federated Hermes to reflect its acquisition of a majority interest in Hermes Fund Managers Limited, a London-based asset manager that pioneered the use of non-financial factors, such as the impact on the environment to predict a company’s future financial performance.
Federated Hermes also switched its investment strategy to focus more attention on issues related to environmental,
social and corporate governance — a class of investing that the world’s largest investors were starting to care more about.
The company has 2,000 employees worldwide. Several hundred employees work from the main office Downtown.
Mr. Clark said although Federated Hermes is new in the ETF space and it is only starting both funds with $25 million each, what sets the funds apart is they are actively traded.
The Federated Hermes Short Duration ETF (NYSE: FHYS) seeks high current income by investing in a diversified portfolio of highyield bonds, bank loans and other securities.
The Federated Hermes Short Duration Corporate
ETF (NYSE: FCSH) seeks current income by investing primarily in securities with maturities of one to five years and will maintain a duration between 1.5 and 3.5 years.
“What I can tell you is if you look at ETF assets, the majority of them are indexed strategies, not active,” he said, arguing that clients are starting to look for more actively managed funds.
“Clients know us very well as mutual fund managers, and the nuance between ETFs and mutual funds from a client’s perspective is really just a preference on how they want to invest or how they want to access our expertise,” Mr. Clark said.