In a significant move that highlights a growing trend in the asset management industry, KKM Financial has transformed its Essential 40 mutual fund into an exchange-traded fund (ETF). This shift reflects broader societal trends toward more tax-efficient investment vehicles and aims to provide both individual investors and financial advisors with greater flexibility in managing their taxable accounts. Unlike traditional mutual funds that may impose unexpected tax liabilities following withdrawals or portfolio rebalancing, ETFs empower investors to better manage capital gains, allowing them to control their tax outcomes more effectively.
Jeff Kilburg, the founder and CEO of KKM Financial, emphasizes the advantages of this transition, stating, “When you look at the tax efficiency of an ETF compared to a mutual fund, it is much more advantageous.” This sentiment echoes the frustrations many wealth advisors share regarding capital gains distributions typically associated with mutual funds. By moving to an ETF model, KKM Financial is positioning itself to meet the evolving demands of the investment landscape while providing solutions that resonate more with tax-conscious investors.
The shift from mutual funds to ETFs is not an isolated case; it is part of a broader industry trend. A pivotal factor in this evolution is the SEC’s 2019 rule change, which simplified the implementation of active investment strategies within ETFs. The impact of this regulatory shift is profound; as of late 2023, active equity mutual funds have fallen to their lowest numbers in 24 years, according to research by Strategas. Investors are increasingly drawn toward the flexibility and potential cost savings offered by ETFs, prompting many asset managers to explore opportunities to restructure their funds accordingly.
Moreover, as many in the industry call for the addition of ETFs as separate share classes within existing mutual funds, this move represents a critical juncture for investors and asset managers alike. The dual share class model could further expand the appeal of ETFs, potentially merging the best of both worlds in terms of investment strategy and tax efficiency.
The newly minted KKM ETF, now trading on the Nasdaq under the ticker symbol ESN, is designed to capture the essence of famous brands and companies that are pivotal to the U.S. economy. With holdings that include corporate giants like JPMorgan Chase, Amazon, Waste Management, and Eli Lilly, the Essential 40 positions itself as a robust option for investors looking to “buy what you use” within a single, equal-weighted fund structure.
By adopting an equal-weighted strategy, the ETF aims to mitigate risks related to market capitalizations that often dominate traditional index funds. Historically, equal-weighted funds have exhibited resilience during market downturns, making them an attractive option for risk-averse investors. Notably, the Essential 40 fund has showcased commendable performance metrics. For instance, despite a turbulent market environment in 2022, it declined less than 11%, significantly outperforming its category average of around 17%.
The early indications of the KKM ETF have been promising. In 2024, prior to its conversion, the fund boasted a year-to-date increase of approximately 16%—a noteworthy achievement considering its asset size of about $70 million. Additionally, the expense ratio for the new ETF is set at 0.70%, mirroring the rate of the previous mutual fund. This consistency in cost structure demonstrates KKM Financial’s commitment to keeping investment expenses in check while enhancing investor returns.
Investor interest in equal-weight strategies has surged in recent years. The Invesco S&P 500 Equal Weight ETF, for example, has attracted over $14 billion in new investor funds in 2023 alone, highlighting a growing preference for funds that diversify risk beyond a select few dominant stocks—also known as the “Magnificent Seven.”
KKM Financial’s transition from mutual fund to ETF is emblematic of a much larger narrative unfolding across the financial landscape. As asset managers adapt to the shifting regulatory environment and evolving investor preferences, the focus on tax efficiency, investment flexibility, and diversification will only intensify. The Essential 40 ETF stands as a testament to innovation in asset management and promises to be a pivotal player for those navigating the complexities of today’s investment environment. As we continue to watch this space, one thing is clear: KKM Financial is positioning itself at the forefront of change, offering investors a bright new avenue for wealth generation.
